Management Consulting/International Business (MS-97)
1. Select any two trade theories and analyse the applicability of these theories in today's context.
2. Describe the main features of MNCs. Critically evaluate the relationship between MNCs and host countries.
3. Analyse the issues and objectives on the code of conduct of Transnational Corporations(TNCs).
4. Discuss the impact of FDI inflows in developing countries and the implications of FDI on National Income and employment in the host economies.
5. Discuss how the MNEs try to develop and maintain commitment of individual managers. Give examples.
HERE IS SOME SOME USEFUL MATERIAL.
SOME ANSWERS HELD BACK DUE TO SPACE CONSTRAINT.
PLEASE FORWARD THESE BALANCE QUESTIONS TO MY EMAIL ID
I will send the balance asap.
What are the major theories of international trade? In your opinion, what is the applicability of those theories (select any two) in today’s environment?
International business began with international trade operations, facilitated by the lasses faire in the world economy. It improved the well-being of many nations, and the imposition of trade barriers reduced the gains from trade, giving rise to the search for alternate avenues to exporting. The latter resulted in the established of subsidiaries in foreign countries through FDI. In this context, it is pertinent to understand the determinants of and the effects of international trade and FDI on the trade trading partners, international operations of multinationals and the economies of the home and hose countries. Several theories have been formulated, from time to time which form the bases of international trade and FDI.
Theory of Mercantilsm
During the sixteenth to the three-fourths of the eighteenth centuries, the world trade was being conducted according to the doctrine of mercantilism. It comprised many modern feature like belief in nationalism and the welfare of the nation alone, planning and regulation of economic activities for achieving the national goals, curbing imports and promoting exports.
The mercantilists believed that the power of a nation lied in its wealth, which grew by acquiring gold from abroad. This was considered possible by increasing exports and impeding imports. Such reasoning gathered support on the ground that gold could finance military expeditions and wars, and the exports would create employment in the economy. Mercantilists failed to realize in all countries, and the mere possession of gold does not enhance the welfare of a people. Keeping the resources in the form of gold reduces the production of goods and services and, thereby lowers welfare. The concentration in the production of goods for domestic consumption by using resources in a less efficient nanner, would also lower production and smaller gains from international trade.
The theory of marecantilism was rejected by Adma Smith and Ricardo by stressing the importance of individual, and pointing out that their welfare was the welfare of the nation. They believed in liberalism and enlightenment, and traded the wealth of the nation in term of the “the sum of enjoyments” of the individuals in society. Any activity, which would increase the consumption of the people, was to be considered with favour. Their trade doctrines were based upon the principals of free trade and the specialization in the production of those goods where resource most suitable.
Theory of Absolute Cost Advantage
The theory of absolute cost advantage was propounded by Adam Smith (1776), arguing that countries gain from trading, if they specialize according to their production advantages. His doctrine may be understood with an example presented in Table
Table shows that, in the absence of trade, both the goods are produced in both the countries, because of their demand in the domestic markets. The cost of production is determined by the amount of labour required in the production of the respective goods. The greater the amount of labour, the higher will be the cost of production, and the commodity will have a larger value in exchange. The pre-trade exchange ratio in country I would be
If trade takes place between these two countries then they will specialize in term of absolute advantage and gain from trading with each other. Country I enjoys absolute cost advantage in the production of good A and country II in good B. One unit of good A may be produced in country I with 10 hours of labour, whereas it costs 20 hors of labour in country II. The production of the units of good B. costs 20 hors of labour in country I and 10 hors of labour in country II. After trade, the international exchange ratio would lie somewhere between the pre-trade exchange ratio of the two countries. If it is nearer to country I domestic exchange ratio then trade would be more beneficial to country II and vice versa. Assuming the international exchange ratio is established IA=IB, then both the trading partners would be able to save 10 hors of labour, which may be used either for the workers as leisure the trading partners would depend upon their economic strength and the bargaining power.
Theory of Comparative Cost Advantage
Ricardo (1875), though adhering to the absolute cost advantage doctrine of Adam Smith, pointed out that cost and advantage to both the trade partners was not a necessary condition for trade to occur. It would still be beneficial to both the trading countries even if one country can produce all the goods with less labour cost than other country. According to Ricardo, so long as the other country is not equally less productive in all lines of production, measurable in terms of opportunity cost of each community in the two countries, it will still be mutually gainful for them if they enter into trade. Ricardo’s theory may be explained by referring to table.
In Table country I enjoyed absolute cost advantage in the production of both the goods A and B as compared to their production in country II. But company I has comparative cost advantage in good B. We take the help of the concept of opportunity cost in order to know the relative comparative advantage in the production of goods in the two countries. The opportunity cost to produce one unit of good A is the amount of good B which has to be sacrificed for producing the additional unit good A.
In the example given in table, the opportunity cost of one unit of A in country I is 0.89 unit of good B and in country II it is 1.2 unit of good B. On the other hand, the opportunity cost of one unit of good B in country I is 1.125 unit of good A and 0.83 unit of good A, in country II. The opportunity cost of two goods are different in both the countries and as long as this is the case, they will have comparative advantage in the production of either good A or good B, and will gain from trade regardless of the fact that one of the trade partners may be possessing absolute cost advantage in both lines of production. Thus, country I has comparative advantage in good A as the opportunity cost of its production is lower in this country as compared to its opportunity cost in country II which has comparative advantage in production of good B on the same reasoning.
The gains from trade in terms of Ricardo’s doctrine may be understood by distinguishing the term of trade under ‘autarky’ (i.e., having no trade with outside world because of the closed economy) and in terms of trade with the outside world. The domestic exchange ratio is determined by the internal cost of production. In Table, the exchange ratio before trade in country I should be IA-0.898 and in country II IA=1. 1B. If the international exchange ratio prevails between 0.98 and 1.2, the international trade would be gainful to both the countries. Assuming it settles as 1A=IB then country I gains 10 hours of labour and country II gains an equivalent of 20 hours of labour.
Both the absolute advantage and comparative advantage theories failed to realise that the welfare of society does not depend only on the gains from the international trade but depends upon the way the gains are distributed. The individual gains under the theories are guaranteed unless the government adopt an appropriate redistribution policy. There them engaged in the exportable production. These theories have also been criticized on the ground that labour is not the only input determining the cost of production.
2. Describe the main features of MNCs. Critically evaluate the relationship between MNCs and host countries.
A corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries.
Nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. Advocates of multinationals say they create jobs and wealth and improve technology in countries that are in need of such development. On the other hand, critics say multinationals can have undue political influence over governments, can exploit developing nations as well as create job losses in their own home countries.
principles of multinational corporations. -- 12marks
The die was cast for more international involvement. Before many years had passed, American companies had invested money in many foreign lands. Revlon, Coca-Cola, GM, most of the oil companies, and even major banks all had large international operations.
If a company wants to venture into the international marketplace, it can use several different methods. In each case, the levels of risk and control move together. The four most common approaches include the following:
• Exporting. The selling of an organization's products to a foreign broker or agent is known as exporting. The organization has virtually no control over how products are marketed after the foreign broker or agent purchases them. Because the investment is relatively small, exporting is a low-risk method of entering foreign markets. The only real danger here is what the foreign agent might do with the products to hurt the organization's or product's image.
• Licensure agreement. This approach allows a foreign firm to either manufacture or sell products, or the right to place a brand name or symbols on products. Disney World, for example, has licensure agreements with many foreign firms. This approach provides more control than an export sale, as a firm can require that certain specifications be met, yet it is still not the manufacturer in the foreign market.
• Multinational approach. With this approach, a firm is willing to make substantial commitment to a foreign market. Normally, products or services are modified to meet the foreign market demands, and in many cases, substantial fixed investments are made in plants and equipment. The most common ways to become a multinational firm are to form joint ventures or global strategic partnerships, or to establish wholly-owned subsidiaries.
• Joint ventures occur when a company forms a partnership with a foreign firm to develop new products or to give each other access to local markets. Normally, the roles and responsibilities of each organization are clearly spelled out in the joint-venture agreement. This approach increases both control and risk.
• Global strategic partnerships are much larger than a simple joint venture. Two firms join together and make a long-term commitment, in the form of time and investments, to develop products or services that will dominate world markets. This approach does not modify products for a particular market but develops a single product market strategy that can be utilized in all markets in hopes of dominating the worldwide market for that product.
• Wholly-owned subsidiaries occur when a firm purchases either controlling interest or all of a foreign firm. Often, the subsidiary firm is given considerable freedom in terms of how to operate in the foreign market, and heavy use of foreign managers and employees is very common. The owning firm does have the most control, but it also has substantial investment risk.
• Vertically integrated wholly-owned subsidiaries exist where a firm owns not only the foreign manufacturer but the foreign distributors and retailers as well. Again, the main emphasis is on dominating a worldwide product or service area with a single product market strategy. True global products are very difficult to develop, and it is even more difficult to dominate all global markets.
Of these approaches, multinational corporations, defined as organizations operating facilities in one or more countries, are major forces in the movement toward the globalization of businesses. Common characteristics of successful multinational corporations include the following:
• Creation of foreign affiliates
• Global visions and strategies
• Engagement in manufacturing or in a restricted number of industries
Location in developed countries
• Adoption of high-skills staffing strategies, cheap labor strategies, or a mixture of both.
13. With a view to stimulating economic growth and development, raising living
standards, meeting manpower requirements and overcoming unemployment and
underemployment, governments should declare and pursue, as a major goal, an
active policy designed to promote full, productive and freely chosen employment.2
14. This is particularly important in the case of host country governments in
developing areas of the world where the problems of unemployment and under-
employment are at their most serious.
15. Paragraphs 13 and 14 above establish the framework within which due
attention should be paid, in both home and host countries, to the employment impact
of multinational enterprises.
16. Multinational enterprises, particularly when operating in developing coun-
tries, should endeavour to increase employment opportunities and standards, taking
into account the employment policies and objectives of the governments, as well as
security of employment and the long-term development of the enterprise.
17. Before starting operations, multinational enterprises should, wherever
appropriate, consult the competent authorities and the national employers’ and
workers’ organizations in order to keep their manpower plans, as far as practicable,
in harmony with national social development policies. Such consultation, as in the
case of national enterprises, should continue between the multinational enterprises
and all parties concerned, including the workers’ organizations.
18. Multinational enterprises should give priority to the employment, occupa-
tional development, promotion and advancement of nationals of the host country at
all levels in cooperation, as appropriate, with representatives of the workers employed
by them or of the organizations of these workers and governmental authorities.
19. Multinational enterprises, when investing in developing countries, should have
regard to the importance of using technologies which generate employment, both
directly and indirectly. To the extent permitted by the nature of the process and the
conditions prevailing in the economic sector concerned, they should adapt technolo-
gies to the needs and characteristics of the host countries. They should also, where
possible, take part in the development of appropriate technology in host countries.
20. To promote employment in developing countries, in the context of an
expanding world economy, multinational enterprises, wherever practicable, should
give consideration to the conclusion of contracts with national enterprises for the
manufacture of parts and equipment, to the use of local raw materials and to the
progressive promotion of the local processing of raw materials. Such arrangements
should not be used by multinational enterprises to avoid the responsibilities
embodied in the principles of this Declaration.
Equality of opportunity and treatment
21. All governments should pursue policies designed to promote equality of
opportunity and treatment in employment, with a view to eliminating any discrimi-
nation based on race, colour, sex, religion, political opinion, national extraction or
22. Multinational enterprises should be guided by this general principle
throughout their operations without prejudice to the measures envisaged in para-
graph 18 or to government policies designed to correct historical patterns of dis-
crimination and thereby to extend equality of opportunity and treatment in employment.
Multinational enterprises should accordingly make qualifications, skill and experience
the basis for the recruitment, placement, training and advancement of their staff at
23. Governments should never require or encourage multinational enterprises
to discriminate on any of the grounds mentioned in paragraph 21, and continuing
guidance from governments, where appropriate, on the avoidance of such discrimi-
nation in employment is encouraged.
Security of employment
24. Governments should carefully study the impact of multinational enterprises
on employment in different industrial sectors. Governments, as well as multinational
enterprises themselves, in all countries should take suitable measures to deal with the
employment and labour market impacts of the operations of multinational enterprises.
25. Multinational enterprises equally with national enterprises, through active
manpower planning, should endeavour to provide stable employment for their
employees and should observe freely negotiated obligations concerning employ-
ment stability and social security. In view of the flexibility which multinational enter-
prises may have, they should strive to assume a leading role in promoting security
of employment, particularly in countries where the discontinuation of operations is
likely to accentuate long-term unemployment.
26. In considering changes in operations (including those resulting from
mergers, take-overs or transfers of production) which would have major employ-
ment effects, multinational enterprises should provide reasonable notice of such
changes to the appropriate government authorities and representatives of the
workers in their employment and their organizations so that the implications may be
examined jointly in order to mitigate adverse effects to the greatest possible extent.
This is particularly important in the case of the closure of an entity involving collec-
tive lay-offs or dismissals.
27. Arbitrary dismissal procedures should be avoided.5
28. Governments, in cooperation with multinational as well as national enter-
prises, should provide some form of income protection for workers whose employ-
ment has been terminated.6
29. Governments, in cooperation with all the parties concerned, should
develop national policies for vocational training and guidance, closely linked with
employment.7 This is the framework within which multinational enterprises should
pursue their training policies.
30. In their operations, multinational enterprises should ensure that relevant
training is provided for all levels of their employees in the host country, as appropriate,
to meet the needs of the enterprise as well as the development policies of the country.
Such training should, to the extent possible, develop generally useful skills and pro-
mote career opportunities. This responsibility should be carried out, where appro-
priate, in cooperation with the authorities of the country, employers’ and workers’
organizations and the competent local, national or international institutions.
31. Multinational enterprises operating in developing countries should partici-
pate, along with national enterprises, in programmes, including special funds, encour-
aged by host governments and supported by employers’ and workers’ organizations.
These programmes should have the aim of encouraging skill formation and develop-
ment as well as providing vocational guidance, and should be jointly administered by
the parties which support them. Wherever practicable, multinational enterprises should
make the services of skilled resource personnel available to help in training programmes
organized by governments as part of a contribution to national development.
32. Multinational enterprises, with the cooperation of governments and to the
extent consistent with the efficient operation of the enterprise, should afford oppor-
tunities within the enterprise as a whole to broaden the experience of local man-
agement in suitable fields such as industrial relations.
CONDITIONS OF WORK AND LIFE
Wages, benefits and conditions of work
33. Wages, benefits and conditions of work offered by multinational enterprises
should be not less favourable to the workers than those offered by comparable
employers in the country concerned.
34. When multinational enterprises operate in developing countries, where
comparable employers may not exist, they should provide the best possible wages,
benefits and conditions of work, within the framework of government policies.8 These
should be related to the economic position of the enterprise, but should be at least
adequate to satisfy basic needs of the workers and their families. Where they pro-
vide workers with basic amenities such as housing, medical care or food, these
amenities should be of a good standard.9
35. Governments, especially in developing countries, should endeavour to
adopt suitable measures to ensure that lower income groups and less developed
areas benefit as much as possible from the activities of multinational enterprises.
36. Multinational enterprises, as well as national enterprises, should respect
the minimum age for admission to employment or work in order to secure the effec-
tive abolition of child labour.10
Safety and health
37. Governments should ensure that both multinational and national enter-
prises provide adequate safety and health standards for their employees. Those gov-
ernments which have not yet ratified the ILO Conventions on Guarding of Machinery
(No. 119), Ionising Radiation (No. 115), Benzene (No. 136) and Occupational Cancer
(No. 139) are urged nevertheless to apply to the greatest extent possible the prin-
ciples embodied in these Conventions and in their related Recommendations (Nos. 118,
114, 144 and 147). The codes of practice and guides in the current list of publications
on occupational safety and health should also be taken into account.11
38. Multinational enterprises should maintain the highest standards of safety
and health, in conformity with national requirements, bearing in mind their relevant
experience within the enterprise as a whole, including any knowledge of special haz-
ards. They should also make available to the representatives of the workers in the
enterprise, and upon request, to the competent authorities and the workers’ and
employers’ organizations in all countries in which they operate, information on the
safety and health standards relevant to their local operations, which they observe in
other countries. In particular, they should make known to those concerned any spe-
cial hazards and related protective measures associated with new products and
processes. They, like comparable domestic enterprises, should be expected to play
a leading role in the examination of causes of industrial safety and health hazards
and in the application of resulting improvements within the enterprise as a whole.
39. Multinational enterprises should cooperate in the work of international
organizations concerned with the preparation and adoption of international safety
and health standards.
40. In accordance with national practice, multinational enterprises should
cooperate fully with the competent safety and health authorities, the representatives
of the workers and their organizations, and established safety and health organiza-
tions. Where appropriate, matters relating to safety and health should be incorpor-
ated in agreements with the representatives of the workers and their organizations.
41. Multinational enterprises should observe standards of industrial relations
not less favourable than those observed by comparable employers in the country
Freedom of association and the right to organize
42. Workers employed by multinational enterprises as well as those employed
by national enterprises should, without distinction whatsoever, have the right to
establish and, subject only to the rules of the organization concerned, to join organ-
izations of their own choosing without previous authorisation.12 They should also
enjoy adequate protection against acts of anti-union discrimination in respect of
43. Organizations representing multinational enterprises or the workers in their
employment should enjoy adequate protection against any acts of interference by
each other or each other’s agents or members in their establishment, functioning or
44. Where appropriate, in the local circumstances, multinational enterprises
should support representative employers’ organizations.
45. Governments, where they do not already do so, are urged to apply the
principles of Convention No. 87, Article 5, in view of the importance, in relation to
multinational enterprises, of permitting organizations representing such enterprises
or the workers in their employment to affiliate with international organizations of
employers and workers of their own choosing.
46. Where governments of host countries offer special incentives to attract
foreign investment, these incentives should not include any limitation of the workers’
freedom of association or the right to organize and bargain collectively.
47. Representatives of the workers in multinational enterprises should not be
hindered from meeting for consultation and exchange of views among themselves,
provided that the functioning of the operations of the enterprise and the normal pro-
cedures which govern relationships with representatives of the workers and their
organizations are not thereby prejudiced.
48. Governments should not restrict the entry of representatives of employers’
and workers’ organizations who come from other countries at the invitation of the
local or national organizations concerned for the purpose of consultation on mat-
ters of mutual concern, solely on the grounds that they seek entry in that capacity.
49. Workers employed by multinational enterprises should have the right, in
accordance with national law and practice, to have representative organizations of
their own choosing recognized for the purpose of collective bargaining.
50. Measures appropriate to national conditions should be taken, where neces-
sary, to encourage and promote the full development and utilization of machinery for
voluntary negotiation between employers or employers’ organizations and workers’
organizations, with a view to the regulation of terms and conditions of employment by
means of collective agreements.15
51. Multinational enterprises, as well as national enterprises, should provide
workers’ representatives with such facilities as may be necessary to assist in the
development of effective collective agreements.16
52. Multinational enterprises should enable duly authorized representatives of the
workers in their employment in each of the countries in which they operate to conduct
negotiations with representatives of management who are authorized to take decisions
on the matters under negotiation.
53. Multinational enterprises, in the context of bona fide negotiations with the
workers’ representatives on conditions of employment, or while workers are exercising
the right to organize, should not threaten to utilize a capacity to transfer the whole or
part of an operating unit from the country concerned in order to influence unfairly those
negotiations or to hinder the exercise of the right to organize; nor should they transfer
workers from affiliates in foreign countries with a view to undermining bona fide negoti-
ations with the workers’ representatives or the workers’ exercise of their right to organize.
54. Collective agreements should include provisions for the settlement of dis-
putes arising over their interpretation and application and for ensuring mutually
respected rights and responsibilities.
55. Multinational enterprises should provide workers’ representatives with infor-
mation required for meaningful negotiations with the entity involved and, where this
accords with local law and practice, should also provide information to enable them
to obtain a true and fair view of the performance of the entity or, where appropriate,
of the enterprise as a whole.17
56. Governments should supply to the representatives of workers’ organiza-
tions on request, where law and practice so permit, information on the industries in
which the enterprise operates, which would help in laying down objective criteria in
the collective bargaining process. In this context, multinational as well as national
enterprises should respond constructively to requests by governments for relevant
information on their operations.
57. In multinational as well as in national enterprises, systems devised by
mutual agreement between employers and workers and their representatives should
provide, in accordance with national law and practice, for regular consultation on
matters of mutual concern. Such consultation should not be a substitute for collective bargaining.18
Examination of grievances
58. Multinational as well as national enterprises should respect the right of the
workers whom they employ to have all their grievances processed in a manner con-
sistent with the following provision: any worker who, acting individually or jointly with
other workers, considers that he has grounds for a grievance should have the right
to submit such grievance without suffering any prejudice whatsoever as a result, and
to have such grievance examined pursuant to an appropriate procedure.19 This is
particularly important whenever the multinational enterprises operate in countries
which do not abide by the principles of ILO Conventions pertaining to freedom of
association, to the right to organize and bargain collectively and to forced labour.20
Settlement of industrial disputes
59. Multinational as well as national enterprises jointly with the representatives
and organizations of the workers whom they employ should seek to establish vol-
untary conciliation machinery, appropriate to national conditions, which may include
provisions for voluntary arbitration, to assist in the prevention and settlement of indus-
trial disputes between employers and workers. The voluntary conciliation machinery
should include equal representation of employers and workers.21
1. advantages of MNCs to host countries?
arguments for and against the operation of MNCs in underdeveloped countries.
Arguments for MNCs(The positive role): The MNCs play an important role in the economic development of underdeveloped countries.
1. Filling Savings Gap: The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings. For example, to achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings that can be domestically mobilised is only 16% then there is a ‘saving gap’ of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve its target rate of economic growth.
2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.
3. Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC governments are able to mobilize public financial resources for development projects.
4. Filling Management/Technological Gap: Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts by means of training programs and the process of ‘learning by doing’.
Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable and productive for the recipient country.
5.Other Beneficial Roles: The MNCs also bring several other benefits to the host country.
(a) The domestic labour may benefit in the form of higher real wages.
(b) The consumers benefits by way of lower prices and better quality products.
(c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs
(d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.
Apart from these there are indirect gains through the realization of external economies.
Arguments Against MNCs(The negative role): There are several arguments against MNCs which are discuss below.
1. Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.
2. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc.
3. While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.
4. The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.
5. MNCs’ impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.
6. MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.
7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.
8. MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.
9. Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises.
8. Case Study:
In the last decade, the Indian animation industry witnessed high growth rates largely due to
some inherent strengths and the cost advantage that it offered. The companies were adopting
different business models, and experts believed that many of these companies were moving up
the value chain. However, they felt that the Indian animation industry had a lot of bottlenecks
and that Indian animation companies had some weaknesses as well. In such a scenario, the
Indian animation companies had to make the right strategic moves in order to tap the full
potential of the market.
In November 2008, NASSCOM announced that the Indian animation industry was poised for
significant growth in the coming years. The industry was expected to record US$1163 million
by 2012, as against the projected US$460 million by the end of 2008, reporting a CAGR of 27
percent, according to a report jointly prepared by NASSCOM and Ernst and Young. There were
several movies slated for release in 2009 including big budget movies like "Sultan-The
Warrior", "Coochie Coochie Hota Hai" and a few more.
The entry of big players into the animation industry served to encourage the animation studios in India, which were hoping to get both investment and more and more original and varied content that would suit the global audience.
Experts felt that the Indian animation industry had gained significant momentum in the 1990s
and the 2000s. It had witnessed the entry of many new players and many of the companies
were moving up the value chain. These companies were adopting different business models in
their bid to take advantage of the huge scope for growth in the industry (Refer to Exhibit III for
the business models adopted by the Indian players). While the projections for growth were good
and some experts felt that the Indian animation companies had some strengths, others pointed
out to weaknesses which could prevent the companies from tapping the full potential of the
global animation industry. Industry experts pointed out that Indian players still accounted for
only a minuscule share of the global animation industry. Turning Point was in the 1990s that
the Indian animation industry witnessed a boom. Ram Mohan and Sako were determined to
make the animated series based on the Ramayana and so Ram Mohan traveled to Japan to
make it happen.
Indian animation Gains Momentum. the low entry barrier and the lure of easy dollars that
could be earned by providing cut-price work for the animation studios from the West
resulted in several small companies crowding the Indian animation industry. The Indian film
industry, which is the second largest in the world, was not involved in animation in a big way.
It had been using animation to a limited extent in live action movies, mostly in the form of
visual effects. The Indian animation industry had been growing at exceptional rates since the
late 1990s, but experts felt that some serious challenges remained in the way of sustaining
such growth rates. A major challenge for the industry was the skilled manpower crunch. Even
though India had a large English speaking labor force, tere was a dearth of readily employable
skilled animators. Industry experts felt that while the growth of the animation industry in
India had been phenomenal, there was an opportunity for it to grow even more. The low cost ofproduction was a huge advantage. For instance, the production cost of a half-hour animated
movie in India cost around US$60-70,000 while in the US, it was around US$250,000-300,000,
according to NASSCOM’s analysis.
(a) Explain the favorable Conditions for Indian animation industry.
THE FAVORABLE CONDITIONS ARE
1.the low cost of production.
2.low entry barriers for businesses.
3.large English speaking labor availability.
4.skilled animators availability.
5.availability of studio facilities.