Multinationals and Liberalisation | Geography Optional for UPSC (Notes) PDF Download

Multinational Companies

• A Multinational Corporation (MNC), also known as a Transnational Corporation (TNC) or Multinational Enterprise (MNE), is a business organization that operates in multiple countries, including its home country. These global enterprises have their main offices or headquarters located in their home country, with additional offices, assets, and factories in other countries, referred to as host countries.
• MNCs conduct their business simultaneously across various nations, making them multi-process and multi-product organizations. Some well-known examples of MNCs include Japan's Sony, the United States' IBM, Germany's Siemens, and India's Videocon and ITC. There are currently over 40,000 MNCs, with more than 250,000 foreign affiliates. The top 300 MNCs control more than 25% of the global economy.
• While American-based MNCs previously dominated the global market, many Japanese, Korean, European, and Indian multinational companies have since expanded their reach worldwide. Before entering a new country, MNC headquarters consult experts in various fields such as political science, economics, international trade, and diplomacy to analyze the business environment and provide advice to top management.

Characteristics of Multinationals

Multinational corporations (MNCs) are constantly on the lookout for new opportunities and conduct thorough risk analysis to understand the business climate of potential markets. They develop expertise in understanding the culture, politics, economy, and legal aspects of the countries they plan to enter. The key distinguishing factor of a true multinational corporation is its commitment to manufacturing, marketing, research and development, and financing opportunities on a global scale, rather than just focusing on domestic markets.
Some of the main characteristics of MNCs include:

• Professional Management: MNCs hire qualified managers to oversee various aspects of their operations, such as technology, finance, and external affairs.
• Control: While MNCs have local management and offices in host countries, ultimate control remains with the head office in their home country.
• Large Assets & Turnover: Due to their global operations, MNCs possess significant physical and financial assets. For example, Microsoft Corp. has a market capitalization of $1000.76 billion.
• Advanced Technology: MNCs rely on cutting-edge technology and employ capital-intensive methods in manufacturing and marketing.
• Flexible Modes of Transfer: MNCs have considerable freedom in selecting financial channels for transferring funds, profits, or both. They can use channels such as patents, trademarks, and intercompany transactions to move funds internationally, depending on the specific circumstances.
• Value for Money: By shifting profits from high-tax to low-tax countries, MNCs can reduce their overall tax payments. They can also transfer funds between their units to circumvent currency controls and access previously untapped investment and financing opportunities.
• Flexibility: MNCs can adjust payment schedules for internationally generated claims, accelerate or delay them as needed. They can also extend trade credit to their subsidiaries, giving them significant financial leverage. Furthermore, the timing of fee and royalty payments can be modified when all parties involved are related.

In summary, multinational corporations are distinguished by their global commitment to manufacturing, marketing, research and development, and financing opportunities. They possess key characteristics such as professional management, control, large assets and turnover, advanced technology, flexibility in fund transfer, value for money, and adaptable payment schedules. These features enable MNCs to effectively navigate the complex international business environment and maximize their growth potential.

Role of MNC

• It promotes the exports of the host country.
• Rapid process of development
• Equalising the cost of production
• Reduce depence on imports
• Rapid industrialisation
• Agent of modernisation

Reasons for the Growth of MNCs

1. Non-Transferable Knowledge
   • It is often possible for an MNC to sell its knowledge in the form of patent rights and to license foreign producers. This relieves the MNC of the need to make foreign direct investments.
   • However, sometimes an MNC that has a Production Process or Product Patent can make a larger profit by carrying out the production in a foreign country itself. The reason for this is that some kinds of knowledge cannot be sold and which are the result of years of experience.
2. Exploiting Reputations
   • In some situations, MNCs invest to exploit their reputation rather than protect their reputation. This motive is of particular importance in the case of foreign direct investment by banks because in the banking business an international reputation can attract deposits.
   • If goodwill is established the bank can expand and build a strong customer base. Quality service to a large number of customers is bound to ensure success. This probably explains the tremendous growth of foreign banks such as Citibank, Grind-lays, and Standard Chartered in India.
3. Protecting Reputations
   • Normally, products, develop a good or bad name, which transcends international boundaries. It would be very difficult for an MNC to protect in reputation if a foreign licensee does an inferior job. Therefore, MNCs prefer to invest in a country rather than licensing and transfer expertise, to ensure the maintenance of their good name.
4. Protecting Secrecy
   • MNCs prefer direct investment, rather than granting a license to a foreign company if protecting the secrecy of the product is important. While it may be true that a license will take precautions to protect patent rights, it is equally true that it may be less conscientious than the original owner of the patent.
5. Availability of Capital
   • The fact that MNCs have access to capital markets has been advocated as another reason why firms themselves moved abroad. A firm operating in only one country does not have the same access to cheaper funds as a larger firm. However, this argument, which has been put forward for the growth of MNCs has been rejected by many critics.
6. Product Life Cycle Hypothesis
   • It has been argued that opportunities for further gains at home eventually dry up. To maintain the growth of profits, a corporation must venture abroad where markets are not so well penetrated and where there is perhaps less competition.
   • This hypothesis perfectly explains the growth of American MNCs in other countries where they can fully exploit all the stages of the life cycle of a product. A prime example would be Gillette, which has revolutionized the shaving systems industry.
7. Avoiding Tariffs and Quotas
   • MNCs prefer to invest directly in a country in order to avoid import tariffs and quotas that the firm may have to face if it produces the goods at home and ships them. For example, a number of foreign automobile and truck producers opened plants in the US to avoid restrictions on selling foreign-made cars. Automobile giants like. Fiat, Volkswagen, Honda, and Mazda are entering different countries not with the products but with technology and money.
8. Strategic FDI
   • The strategic motive for making investments has been advocated as another reason for the growth of MNCs. MNCs enter foreign markets to protect their market share when this is being threatened by the potential entry of indigenous firms or multinationals from other countries.
9. Symbiotic Relationships
   • Some firms have followed clients who have made direct investments. This is especially true in the case of accountancy and consulting firms. Large US accounting firms, which know the parent companies’ special needs and practices have opened offices in countries where their clients have opened subsidiaries.
   • These US accounting firms have an advantage over local firms because of their knowledge of the parent company and because the client may prefer to engage only one firm in order to reduce the number of people with access to sensitive information. Templeton, Goldman Sachs, and Earnest and Young are moving with their clients even to small countries like Sri Lanka, Panama, and Mauritius.

Country Risk

• When making over direct investment it is necessary to allow for risk due to investments being made in a foreign country. Country risk is one of the special issues faced by MNCs when investing abroad. It involves the possibility of losses due to country-specific economic, political, and social events.
• Among the country risks that are faced by MNCs are those related to the local economy, those due to the possibility of confiscation i.e. Government takes over without any compensation, and those due to expropriation i.e., Government takeover with compensation which at times can be generous. In addition, there are the political/social risks of wars, revolutions, and insurrections.
• Even though none of these latter events are specifically directed towards MNC by the foreign government, they can damage or destroy an investment. There are also risks of currency non-convertibility and restrictions on the repatriation of income. International magazines like Euro Money and the Economist regularly conduct country risk evaluations in order to facilitate MNCs.

Methods of Reducing Country Risk and Control

1. Controlling Crucial Elements of Corporate Operations
   • Most of the MNCs try to prevent operations in developing countries by other local entities without their cooperation. This can be achieved if the company maintains control of an element of operations.
   • For example, food and soft drink manufacturers keep their special ingredients secret. Automobile companies may produce vital parts such as engines in some other country and refuse to supply these parts if their operations are seized.
2. Programmed Stages of Planned Disinvestment
   • There is an alternative technique to hand over ownership and control to local people in the future. This is sometimes a requirement of the host government. There is a calculated move to involve themselves in stages.
3. Joint Ventures
   • Instead of promising shared ownership in the future, an alternative technique for reducing the risk of expropriation is to share ownership with private or official partners in the host country from the very beginning.
   • Such shared ownerships, known as joint ventures rely on the reluctance of local partners, if private, to accept the interference of their own Government as a means of reducing expropriation.
   • When the partner is the government itself, the disincentive to expropriation is concerned over the loss of future investments. Multiple joint ventures in different countries reduce the risk of expropriation, even if there is no local participation. If the government of one country does expropriate the business, it faces the risk of being isolated simultaneously by numerous foreign powers.

Problems from the Growth of MNCs

• Much of the concern about MNCs stems from their size, which can be formidable. MNCs may impose on their host governments to the advantages of their own shareholders and the disadvantages of citizens and shareholders in the country of shareholders in the past.
• It can be difficult to manage economics in which MNCs have extensive investments. Since MNCs often have ready access to external sources of finance, they can blunt local monetary policy. When the Government wishes to constrain any economic activity, MNCs may nevertheless expand through foreign borrowing.
• Similarly, efforts at economic expansion may be frustrated if MNCs move funds abroad in search of advantages elsewhere. Although it is true that any firm can frustrate plans for economic expansion due to integrated financial markets, MNCs are likely to take advantage of any opportunity to gain profits.
• As we have seen, MNCs can also shift profits to reduce their total ‘tax burden by showing larger profits in countries with lower tax rates citizens and shareholders in the country of shareholders in the past.

Multinational Companies of India

• MNCs have been operating in India even prior to Independence, like Singer, Parry, Philips, Unit- Lever, Proctor, and Gamble. They either operated in the form of subsidiaries or entered into collaboration with Indian companies involving the sale of technology as well as the use of foreign brand names for the final products.
• The entry of MNCs in India was controlled by existing industrial policy statements, MRTP Act, and FERA. In the pre-reform period, the operations of MNCs in India were restricted.

Best Multinational Companies in India
Microsoft

• Microsoft currently has offices in the 9 cities of Ahmedabad, Bangalore, Chennai, Hyderabad, Kochi, Kolkata, Mumbai, the NCR (New Delhi and Gurugram), and Pune. It is the No.1 amongst the best 25 multinational companies in India.

Apple Inc

• Major products are Macintosh, iPod, iPhone, Apple Watch, Apple TV, iOS, tvOS, iLife, iWork, Logic Pro, etc. Apple is an equal opportunity employer that is committed to inclusion and diversity. 

IBM (International Business Machines Corporation)

• Its offerings are included in different categories such as cognitive computing, data and analytics, Internet of Things, Mobile, Security, and Infrastructure. IBM India provides facilities in Bengaluru, Ahmedabad, Delhi, Kolkata, Mumbai, Chennai, Pune, Gurugram, Noida, Bhubaneshwar, Coimbatore, Visakhapatnam, and Hyderabad.

Google

• Google India has its branches in Bangalore, Mumbai, Gurugram, and Hyderabad. It has a lot of job opportunities in Software Engineering & Developments, Operations, Product Management, Technical Client-Facing, Sales and Account Management, Product and Customer Support, Sales Operations, and Business Strategy.

Amazon

• Its major products are Amazon Appstore, Amazon Echo, Amazon Kindle, Amazon Prime, Amazon Video, ComiXology, etc. It has job openings in Bangalore, Delhi, Chennai, Hyderabad, and Mumbai.

The Coca-Cola Co.

• The Coca-Cola Co. is a well-known soft drinks brand and also a market leader into the field of soft drinks. They offer different variants like Diet Coke, Coca Cola Cherry, Coca Cola Life, Coca Cola Citra, etc.

Pepsi Co.

• Their brands include Pepsi, Lays Potato Chips, Seven Up, Mountain Dew, Tropicana, Mirinda, etc. Pepsi Co headquarters is in New York and headed by Indira Nooyi (former Chairman & CEO).

Mahindra Group

• Mahindra Group (headquartered in Mumbai) has a presence in aerospace, agribusiness, aftermarket, automotive, components, construction equipment, defense, energy, farm equipment, finance and insurance, industrial equipment, information technology, leisure and hospitality, logistics, real estate, retail, & two-wheelers.

Procter & Gamble

• P&G made its way into India in 1964 and currently has various products such as Olay, Gillette, Vicks, Tide, etc. It has a wide range of products including beauty, grooming health and household care, etc.

Sony Corporation

• A well-known Japanese Multinational Company dealing in televisions, mobile phones, cameras, PlayStations, headphones and memory cards, etc.
• Its headquarter is situated in Delhi, India.

Samsung

• Samsung is undoubted, the world’s largest manufacturer of smartphones. Samsung was founded in the year 1938 in Daegu, Japanese Korea. It holds its place every time whenever the topic best 25 multinational companies in India is raised.

TATA Group (TCS & TATA Motors)

• TATA Motors’ products include passenger cars, trucks, vans, coaches, buses, sports cars, construction equipment, and military vehicles.
• TCS is an Indian multinational information technology (IT) service and consulting company and also the second-largest Indian company by market capitalization.

Infosys

• NIA (Next Generation Integrated AI Platform), Infosys Consulting for global management solutions, Infosys Information Platform, Edge Verve Systems, and Panaya Cloud Suite. Headquartered in Bangalore, India, Infosys has offices in the USA, China, Middle East, Japan, and Europe. 

Accenture

• Accenture is a global management consulting & professional services firm that provides strategy, consulting, digital, technology & operations services. In 2015, the company hired around 150,000 employees in India.

Nestlé

• Nestlé’s products include baby food, medical food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks. It is the largest food company in the world, measured by revenues and other metrics, since 2014.

Aditya Birla Group

• Aditya Birla Group is an Indian multinational conglomerate, headquartered in Mumbai. It operates in 35 countries with more than 120,000 employees worldwide. Sectors include viscose staple fiber, metals, cement, viscose filament yarn, branded apparel, carbon-black, chemicals, fertilizers, insulators, financial services, telecom, BPO, and IT services.

Hewlett Packard Enterprise

• HP, an American Electronics and IT Company, has its headquarters in Banglore, India. HP produces a line of printers, digital cameras, scanners, PDAs, calculators, servers, workstation computers, and computers for home and small-business purposes.

Deloitte

• Deloitte provides audit, tax, consulting, enterprise risk & financial advisory services with more than 2,86,200 professionals globally. In the financial year 2018, the network earned a record $43.2 billion USD in aggregate revenues and of course, it has made it to the list of the best 25 multinational companies in India.

Dell

• Dell sells personal computers (PCs), servers, data storage devices, network switches, software, computer peripherals, HDTVs, cameras, printers, MP3 players, and electronics. Dell is one of the largest technological corporations in the world, employing nearly 1,45,000 people in the U.S. and around the world.

Unilever

• Major products include foods, beverages, personal care, and cleaning agents. It is one of the oldest multinational companies. It has research and development facilities in the United Kingdom, Netherlands, China, India, and United States.

CITI Group

• It operates in India through the subsidiary, Citibank, which presently has more than 40 branches in over 30 cities in India. It now owns the world’s largest financial services.

LTI

• LTI positioned as a Leader in Zinnov Zones 2018 for IoT Technology Services. Institutional Investor Magazine ranked LTI CEO & MD, Sanjay Jalona, among the Best CEOs in Technology. The company has 39 offices in 27 countries.

Nike Inc.

• Nike is engaged in design, development, manufacturing, and worldwide marketing and sales of footwear, apparel, equipment & accessories. Nike’s Japan and Asia-Pacific-based offices are home to thousands of employees across Japan, Korea, India, Singapore, Malaysia, Indonesia, Vietnam, Thailand, Sri-Lanka, South Africa, New Zealand, and Australia.

Johnson & Johnson

• Johnson & Johnson Pvt. Limited is organized into 3 business segments: Consumer Healthcare, Medical Devices, and Pharmaceuticals in India. It ranked No.37 on the 2018 Fortune 500 list of the largest United States corporations by total revenue.

Adidas

• Adidas designs and manufactures shoes, clothing, and accessories. It is the second-largest in the world, after Nike. Adidas has its headquarters in Gurugram, Haryana. Adidas India hopes to double its revenue from Rs.805 crores by 2020.

New Industrial Policy 1991 and Multinational Corporations

• The New Industrial Policy 1991, removed the restrictions of entry to MNCs through various concessions. The amendment of FERA in 1993 provided a further concession to MNCs in India.
• At present MNCs in India can–
  • Increase foreign equity up to 51 percent by remittances in foreign exchange in specified high priority areas. Subsequently, MNCs are free to own a majority share inequity in most products.
  • Borrow money or accept deposits without the permission of the Reserve Bank of India.
  • Transfer shares from one non-resident to another non-resident.
  • Disinvest equity at market rates on stock exchanges.
  • Go for 100 percent foreign equity through the automatic route in Specified sectors.
  • Deal in immovable properties in India.
  • Carry on in India any activity of trading, commercial or industrial except a very small negative list.
• Thus, MNCs have been placed at par with Indian Companies and would not be subjected to any special restrictions under FERA.

Role of Multinational Corporations in the Indian Economy

• Prior to 1991 Multinational companies did not play many roles in the Indian economy. In the pre-reform period, the Indian economy was dominated by public enterprises.
• To prevent concen­tration of economic power industrial policy 1956 did not allow the private firms to grow in size beyond a point. By definition, multinational companies were quite big and operate in several countries.
• While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play many roles in the Indian economy where the import-substitution development strategy was followed. Since 1991 with the adoption of industrial policy of liberalization and privatization rote of private foreign capital has been recognized as important for the rapid growth of the Indian economy.
• Since the source of the bulk of foreign capital and investment are a multinational corporations, they have been allowed to operate in the Indian economy subject to some regulations.
• The following are the important reasons for this change in policy towards multinational companies in the post-reform period.
  • Promotion Foreign Investment
  • Non-Debt Creating Capital inflows
  • Technology Transfer
  • Promotion of Exports

Impact of MNC on India Economy

• Profit maximization 
• Increased Revenue
• Large amount of tax collections through MNC’s
• Economic health improved
• Employment increased
• Foreign relation increased
• Concentration in consumer goods
• Cultural explosion

Positive impact

• Global acquisition
• Increased employment rate in country
• Foreign Investment
• Promotion of Competition  
• Cheaper goods available due to economies of scale

Negative Impact

• The problem of dumping
• Cultural homogenisation.
•  Feeling of labour exploitation by outsourcing.
• Transfer pricing.
• Economic uncertainty.

Criticisms against MNCs in India
The operations of MNCs in India have been opposed on the following grounds:

• They are interested more in mergers and acquisitions and not in fresh projects.
• They have raised a very large part of their financial resources from within the country.
• They supply second-hand plants and machinery declared obsolete in their country.
• They are mainly profit-oriented and have short term focus on quick profits. National interests and problems are generally ignored.
• They use expatriate management and personnel rather than competitive Indian Management.
• Though they collect most of the capital from within the country, they have repatriated huge profits to their mother country.
• They make no effort to adopt an appropriate technology suitable to their needs. Moreover, the transfer of technology proves very costly.
• Once an MNC gains a foothold in a venture, it tries to increase its holding in order to become a majority shareholder.
• Further, once financial liberalizations are in place and free movement is allowed, MNCs can destabilize the economy.
• They prefer to participate in the production of mass consumption and non-essential items.

Liberalisation

• Liberalization of the economy means its freedom from direct or physical controls imposed by the government.
• After launching its First Five Year Plan (April 1, 1951), India started its journey to economic development treading the path of the socialistic pattern of society. Between 1st to 6th five-year plans, the public sector was assigned the primary role in the process of growth and development. For example, the setting up of BHEL in the 1960s and NTPC in the 1970s.
• The private sector was to play only a secondary role. Industry and trade were subjected to many restrictions including quotas of production and permits of export and import. The focus was on protecting the domestic industry from international competition.
• However, the growth of private monopolies was to be curbed. It is not denying the fact that initially, the policy of licenses, permits, and quotas yielded some good results, but the end result was disappointing. While public sector enterprises became the breeding centers of corruption and inefficiencies, the private sector (in the absence of competition), failed to diversify or modernize.
• The cumulative effect was that our economy started slipping into stagnation, and by the end of June 1991, we landed into an unprecedented economic crisis. The situation was so alarming that our reserves of foreign exchange almost dried up and were barely enough to pay for two weeks’ imports. New loans were not available.
• The following observations highlight the seriousness of the situation and the need for economic reforms:
  • Fiscal Deficit: Fiscal deficit was estimated to be 5.4 percent of GDP in 1981-82 to shot up 8.4 percent of GDP in 1990-91
  • Balance Of Payments (BoP) Crisis: In 1980-81, the balance of payments on the current account was adverse to the tune of Rs. 2,214 crore and in 1990-91 it rose to Rs. 17,367 crore. Foreign loans which were 12 percent of GDP (gross domestic product) in 1980-81, rose to 23 percent of GDP in 1990-91. Accordingly, the burden of foreign debt service increased tremendously. In 1980-81, foreign debt service constituted 15 percent of our export earnings while in 1990-91, it rose to 30 percent. This caused a severe depletion in our Forex reserves and crises of confidence in the international foreign exchange market
  • Gulf Crisis: On account of the Iraq war in 1990-91, prices of petrol shot up. India used to receive a huge amount of remittances from Gulf countries in foreign exchange. In the wake of war, this took a serious hit. The Gulf crisis thus further deepened the BoP crises.
  • Fall in Foreign Exchange Reserves: In 1990-91, India’s foreign exchange reserves fell to such a low level that there were not enough to pay for an import bill of even 10 days. In such a state of crisis, the government had to helplessly resort to the policy of liberalization as advised by the World Bank.

Why India waited till 1991 to open its doors?

• India after independence put barriers on foreign trade and investments as it was felt that it was necessary to protect the producers within the country from foreign competition. It was felt that imports would not have allowed these industries to come up.
• Strict restrictions were imposed, except on essential items like petroleum products, capital goods, and fertilizers, etc. This is in tune with the protection offered by the developed countries also, during their early stages of development.
• Situation during the 1980s till 1991
  • There is a feeling that the mixed economy framework followed since independence resulted in the establishment of a variety of rules and laws, which ultimately resulted in permit license raj.
  • During 1990/1991 government was not in a position to make repayments on its borrowings from abroad.
  • In 1990-91, India’s foreign exchange reserves fell to such a low level that these were not enough to pay for an import bill of even 10 days. Forex reserves that were Rs. 8,151 crore in 1986-87, declined sharply to Rs. 6,252 crore in 1989-90.
  • Government’s expenditure was much higher than revenue during the 1980s and continued spending on development programs did not generate additional revenue.
  • Government could not sufficiently generate income from internal sources like taxation. Larger share of expenditure has gone to areas like the social sector and defense.
  • In 1951, there were just 5 enterprises in the public sector in India but in March 1991, their number multiplied to 246. Several thousand crores of rupees were invested in their expansion. In the initial 15 years, their performance was encouraging but thereafter most of these started showing losses. Because of their poor performance, public sector undertakings degenerated into a liability.
  • Money borrowed from foreign Governments/ multinational institutions was spent for meeting the consumption needs of the government.
  • At one stage, there was not sufficient foreign exchange to pay the interest that needs to be paid to international lenders.
  • India approached international financial institutions like IBRD, IMF for loans and while granting loans, the international agencies wanted India to liberalize and open up the economy by removing restrictions on the private sector and at the same time reduce the role of the government in many areas.
  • This ultimately led to the New Economic Reforms of 1991

Globalisation and Liberalisation

• The process of removing barriers of trade is called liberalisation and removal of trade barriers results in the phenomenon of globalisation. Globalization is primarily economic phenomenon, involving the increasing interaction, or integration, of national economic systems through the growth in international trade, investment, and capital flows.
• Liberalisation was introduced to end up the trade restrictions and open up various sectors of economy.
• There were some measures in 1990 in areas of industrial licensing, export import policy, technology up gradation, fiscal policy and foreign investment, but they were not sufficient.
• Under New Economic Policy 1991, major reforms were initiated, which were comprehensive.

Features of Liberalisation

1. Industrial Sector Reforms under Liberalization:
   • Scenario till 1991
     • Industrial licensing under which every businessman had to get permission from the government officials to start a firm or close a firm.
     • Government permission was also required to decide the number of goods that could be produced
     • The private sector was not allowed in many industries
     • Some goods could be produced only in small scale industries
     • The government used to control prices and distribute selected industrial products, which led to corruption.
   • Scenario since 1991
     • Many of the restrictions as stated above were removed.
     • Industrial licensing was removed for almost all the products except for the following five industries: (a) liquor, (b) cigarette, (c) defense equipment, (d) industrial explosives, and (e) dangerous chemicals.
     • Under the new industrial policy, the number of industries reserved for the public sector was reduced from 17 to 8. In 2010-11, the number of these industries was reduced merely to two viz. (i) Atomic energy, and (ii) Railways.
     • Many production areas which earlier were reserved for SSI (small-scale industries) were de-reserved. Forces of the market were allowed to determine the allocation of resources (rather than the directive policy of the government).
     • In many industries, the market has been allowed to determine the prices.
2. Financial Sector Reforms (major reforms since 1991)
   • Liberalization implied a substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector.
   • Private sector banks like ICICI, Kotak, HDFC, etc, both domestic and international, were established.
   • Gradually FDI and FPI limits were increased in various sectors.
   • Banks were allowed to generate resources from India and abroad
   • Several reforms were brought in insurance, money and capital markets, etc.
   • New institutional regulators and structures such as SEBI, BSE, NSE, PFRDA, and IRDA were erected in the face of new realities of the Indian financial sector.
3. Tax Reforms (major reforms since 1991)
   • Since 1991, there has been a continuous reduction in the taxes on individual income.
   • It was felt that high rates of income tax were an important reason for tax evasion and hence moderate tax rates in income tax, as well as corporate tax, are introduced.
   • Many procedures have been simplified
   • Reforms have been introduced in indirect taxes and the most recent one is Goods and Service Tax (GST).
4. Foreign Exchange Reforms
   • Rupee was devalued against foreign currencies. It was done basically to increase exports and ultimately to build up foreign exchange reserves
   • Devaluation of the Indian rupee against foreign currencies increased the supply of foreign exchange into the Indian economy.
   • Subsequently, demand, and supply of foreign exchange determined exchange rates and Government’s intervention is quite minimal in this aspect. Rarely RBI intervenes, which is known as ‘managed float’.
5. Trade and investment policy reforms
   • Gradually quantitative restrictions on imports were eased.
   • Import licensing was abolished except in the case of hazardous and environmentally sensitive industries.
   • Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.
   • Export duties have been removed to increase the competitiveness of the Indian goods in the international markets.
   • FDI/FPI liberated gradually.
6. Disinvestment
   • Disinvestment and Privatization are two different terms in a technical sense, though both involve the sale of the Government’s share in the Public Sector Undertakings. The term privatization is used for a stake sell in which there is a transfer of 51% or more equity to the private players. In disinvestment, the government sells only a part of the equity which is essentially less than 51% so that ownership and management rights can behold by the Government itself.
   • The method of disinvestment in India changes from time to time, mostly depending on the party at the center.
   • There are primarily 2 different approaches to disinvestments
     (i) Minority Disinvestment: Minority disinvestment in PSUs is such that, at the end of it, if the government of India retains a majority stake (typically more than 51%) in the company, it ensures management control.
     (ii) Strategic Sale: It is the sale of a substantial portion of government shareholding, 50 percent or higher, in a PSU, along with the transfer of management control. It is in contrast with the minority sale where shares in an enterprise are sold as public offers. Here management goes out of the government’s hands and the government becomes a minority stakeholder.

Privatisation

• Privatization means a transfer of ownership, management, and control of public sector enterprises to the private sector. It is of two types:
  • Privatisation by the withdrawal of the government ownership and management i.e. coming out of majority control of public sector companies.
  • Privatisation by the outright sale of public sector companies.
• Most of the profitable undertakings were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy. They were set up with the intention of providing infrastructure and direct employment to the public.
• Subsequently, the government gave more managerial and operational autonomy by declaring them as Navaratnas, Minratnas etc. However, the privatization of public sector enterprises could not take place on the desired lines, and probably this is one of the failures of the Government’s New Economic Policy of 1991.

Globalisation

• Globalization is seen as a process defining the growing interdependence between various economies of the world. The term is also used specifically for economic globalization which stands for aligning regional economies with the global economies through the vehicle of trade, FDI, the flow of capital, technological advancement, and also wide-scale migration.
• It was only after the economic liberalization in 1991, Indian economy tasted the freedom of trade induced by globalization in a real sense.
• Globalisation is the outcome of the policies of liberalization and privatization.
• It is the free movement of trade, investment, people, services, and technologies across the countries boundaries (with some controls).
• It is a complex phenomenon and various commercial activities are being undertaken in places, where it is cheaper to do so.
• It has led to the greater interdependence and integration of economic activities across the globe.
• It involves the creation of networks and activities transcending economic, social, and geographical boundaries. Thus, happening in one country can be influenced by happening in another country.
• The complex web of globalization can be understood by the fact that today company like Apple does its R&D work in the USA, manufactures its components in China, imports some accessories from Thailand, assembles its components in Poland, and have its call centers in India.

Outsourcing- An offshoot of Globalisation

• Outsourcing occurs when a company retains another business to perform some of its work activities. These companies are usually located in foreign countries with lower labour costs and a less strict regulatory environment.
• Companies hire regular services from external sources mostly from other countries. The services are mainly backend computers related such as BPOs, KPOs.
• Outsourcing has intensified in recent times because of the advent of Information and Communication Technologies (ITC).
• The low wage rates and availability of English-speaking skilled manpower in India have made it a destination for global outsourcing in the post-reform period of India.

Advantages of Globalisation

• Globalisation has increased competition across various economic sectors, resulting in improved productivity in domestic industries, although this is only partially true in some countries. It has also enhanced the quality of products while lowering their prices, offering a broader range of choices to consumers. Consequently, the standard of living has improved for many people due to increased income and opportunities in society.
• Globalisation has also encouraged the inflow of foreign capital and advanced technology, leading to better production quality. One industry that has significantly benefited from globalisation is the IT sector. Additionally, local companies providing raw materials to large industries have experienced growth, with some of them becoming multinational corporations.
• There has been a considerable improvement in foreign portfolio investment (FPI) and foreign direct investment (FDI) due to globalisation. In 1990-91, both FPI and FDI combined amounted to only 100 million dollars, whereas in 2015-16, FDI alone reached around 40 billion dollars. Furthermore, foreign exchange reserves have grown from nearly half a billion dollars in 1990-91 to 373 billion dollars at present.
• GDP growth rate prior to 1980 was known as the Hindu rate of growth and was around 3%. But, after liberalization it grew drastically as shown in the table below:
• Most of the GDP growth is mainly due to the growth in the service sector.
• Because of globalization, Indian companies made footprints abroad like TATAs acquisition of Tetley, Corus, and NatSteel as well as acquisitions by companies like VSNL.

Disadvantages of Globalisation

• Globalisation has led to several disadvantages in India, including an increasing disparity between rural and urban employment, the growth of slum capitals, and the threat of terrorist activities. While the more affluent sections of urban areas benefit the most from globalisation, others suffer from its negative consequences.
• Increased competition between foreign and domestic companies in the Indian market has led to the closure of some small producers who could not withstand global competition. This has affected various industries such as battery manufacturing, plastic toys, tires, and micro, small, and medium enterprises (MSMEs), leading to unemployment.
• Employment opportunities created by globalisation tend to be temporary and flexible due to the competitive and uncertain nature of the global market. While the Indian manufacturing sector has suffered, the services sector has seen some benefits from globalisation.
• Domestic industries have also faced difficulties due to the subsidies provided to local industries in certain countries. This has had a negative impact on the growth and employment generation in India, as it has not been proportional to the substantial economic growth experienced.
• Public investment in the agricultural sector, particularly in infrastructure such as irrigation, power, roads, market linkages, and research and development, has decreased since the onset of economic reforms. This has been one of the most significant drawbacks of these reforms.
• Global competition has led to the complete elimination of certain MSMEs, with the toy industry being a classic example. Reforms in the power sector have also led to a steep increase in power tariffs, which has negatively affected certain sections of society, as evidenced by the suicides of Sircilia power loom workers.
• Small and marginal farmers have been adversely affected by globalisation, which has led to an increasing number of suicides among cotton farmers in the Deccan region of the country. Furthermore, the industrial sector has suffered due to the import of cheaper goods that have replaced the demand for domestically produced items.
• Globalisation has led to investment being concentrated in only a few sectors, leaving infrastructure development inadequate across the country. Protectionist policies adopted by developed countries have also hindered the export income of developing countries like India, as they do not provide a level playing field.
• The reduction in tariffs and pressure from multilateral lending institutions has had a negative impact on development and welfare expenditure in India. Overall, globalisation has had both positive and negative effects, with some sectors benefiting while others suffer from its consequences.

Conclusion

In conclusion, multinational corporations (MNCs) play a crucial role in the global economy and have significantly influenced the Indian economy since the adoption of liberalization and privatization policies in 1991. MNCs possess unique characteristics, such as professional management, control, large assets and turnover, advanced technology, flexibility in fund transfer, value for money, and adaptable payment schedules, which enable them to effectively navigate the complex international business environment. The growth of MNCs in India has led to increased foreign investment, technology transfer, promotion of exports, and overall economic development.

Frequently Asked Questions (FAQs) of Multinationals and Liberalisation

What are some examples of well-known multinational corporations?

Some well-known examples of multinational corporations include Japan's Sony, the United States' IBM, Germany's Siemens, and India's Videocon and ITC.

What are the key characteristics of multinational corporations?

Key characteristics of multinational corporations include professional management, control, large assets and turnover, advanced technology, flexibility in fund transfer, value for money, and adaptable payment schedules.

What are some reasons for the growth of multinational corporations?

Reasons for the growth of multinational corporations include non-transferable knowledge, exploiting reputations, protecting reputations, protecting secrecy, availability of capital, product life cycle hypothesis, avoiding tariffs and quotas, strategic FDI, and symbiotic relationships.

What are some challenges faced by multinational corporations?

Multinational corporations face challenges such as country risk, which involves the possibility of losses due to country-specific economic, political, and social events. They also face challenges in managing large-scale operations and navigating complex international business environments.

How has the role of multinational corporations in the Indian economy changed since 1991?

Since 1991, with the adoption of the industrial policy of liberalization and privatization, the role of private foreign capital and multinational corporations has been recognized as important for the rapid growth of the Indian economy. They have been allowed to operate in the Indian economy subject to some regulations, and their roles have expanded in areas such as promoting foreign investment, technology transfer, and export promotion.