Global Business & Investment: MNCs, FDI, and FII play a crucial role in shaping international trade dynamics and enhancing economic growth. Effective management of these global financial flows and corporate operations ensures sustainable development, innovation, and competitive advantage in the global marketplace.
Multinational Corporations
A Multinational Company (MNC) is a business entity that operates in multiple countries while being headquartered in one. These companies have production facilities, offices, and markets across various nations, enabling them to reach a global customer base. MNCs contribute significantly to global economic growth, employment, and technological advancement.
Key Features of MNCs:
- Global Presence: Operate in multiple countries across different regions.
- Centralized Headquarters: Main decision-making occurs at a single corporate headquarters.
- Large-Scale Operations: Extensive supply chains, production, and distribution networks.
- Research & Development (R&D): Continuous innovation to remain competitive.
- Technological Leadership: Utilize advanced technologies for efficiency.
- Brand Recognition: Strong, well-known global brand identity.
- Diverse Workforce: Employ people from different cultural and national backgrounds.
- Example- Google, Apple, Saudi Aramco, Toyota Motors, etc
Types of Multinational Companies (MNCs) with Examples
Multinational Companies (MNCs) operate in various ways depending on their business strategy, level of control, and approach to global markets. Based on their structure and operations, MNCs are classified into four major types:
- Centralized (Global) Corporation
- Decentralized (Multi-Domestic) Corporation
- Transnational Corporation (TNC)
- International Company
Centralized (Global) Corporation
A centralized multinational corporation maintains strict control over its global operations. All key business decisions, including product design, marketing, and pricing, are made at the company’s headquarters. Subsidiaries in different countries follow a standardized approach with little local customization.
- Key Features:
- Standardized Products & Services: Same offerings across all markets.
- Strong Central Control: Headquarters make major decisions.
- Cost Efficiency: Lower costs due to economies of scale.
- Minimal Local Adaptation: Less focus on regional preferences.
- Examples:
- Apple Inc. (USA) – Apple’s products, such as iPhones, MacBooks, and iPads, are nearly identical worldwide. Marketing campaigns are also globally consistent.
- Coca-Cola (USA) – While Coca-Cola has some local flavor variations, its branding, packaging, and overall product remain consistent across markets.
Decentralized (Multi-Domestic) Corporation
A decentralized multinational company allows each subsidiary to operate independently, making decisions based on local market demands. The company customizes its products, marketing, and strategies for each region to cater to cultural and consumer preferences.
- Key Features:
- High Local Adaptation: Products and services tailored to different markets.
- Independent Subsidiaries: Local management has significant autonomy.
- Focus on Customer Preferences: Business strategies consider local cultural and economic factors.
- Flexible Decision-Making: Regional teams handle market-specific decisions.
- Examples:
- Nestlé (Switzerland) – The company adapts its food products to local tastes. For example, Nestlé sells Maggi noodles with different spice levels in India and China, while its chocolates vary in flavors across different regions.
- McDonald’s (USA) – McDonald’s menus vary significantly by country. In India, McDonald’s offers vegetarian options like the McAloo Tikki Burger, while in Japan, it has teriyaki burgers.
Transnational Corporation (TNC)
A transnational company blends features of both centralized and decentralized structures. It operates globally but allows significant local autonomy. The company integrates global efficiency with local responsiveness, creating a balance between standardized products and regional customization.
- Key Features:
- Combination of Global and Local Strategies: Some functions (e.g., branding) are centralized, while others (e.g., product customization) are decentralized.
- Integrated Operations: Subsidiaries collaborate and share resources.
- Flexible Structure: Allows adjustments based on market demands.
- Focus on Innovation and Knowledge Transfer: Encourages exchange of best practices between different units.
- Examples:
- Unilever (UK & Netherlands) – Operates as both a global and local entity, offering standardized branding but locally adapted products.
- Toyota (Japan) – Toyota manufactures cars in various countries but customizes vehicle designs and features based on market conditions.
International Company
An international company primarily focuses on exports and does not have significant foreign operations, subsidiaries, or production facilities abroad. These companies manufacture goods in their home country and sell them in international markets through exports or distributors.
- Key Features:
- Limited Foreign Presence: No large-scale overseas facilities.
- Export-Oriented Business Model: Goods are produced domestically and sold internationally.
- Lower Investment in Foreign Markets: No major production or R&D centers outside the home country.
- Relies on Distributors & Partners: Uses third-party agents to expand internationally.
- Examples:
- Boeing (USA) – Boeing manufactures airplanes in the U.S. and sells them globally without setting up factories in other countries.
- Ferrari (Italy) – Ferrari produces its luxury cars in Italy and exports them worldwide without local manufacturing plants.
Advantages of becoming a Multinational Company (MNC)
Market Expansion and Revenue Growth :
MNCs enter international markets to increase their customer base and boost revenue. Operating in multiple countries allows them to:
- Tap into new consumer markets beyond their home country.
- Reduce dependency on a single economy or region.
- Exploit rising demand in emerging markets like India, China, and Brazil.
- Example: McDonald’s expanded worldwide to increase its customer base and revenue, offering region-specific menu items.
Cost Reduction and Economies of Scale :
By expanding globally, MNCs can achieve lower production and operational costs through:
- Lower labor costs in developing countries.
- Bulk purchasing of raw materials at discounted prices.
- Operational efficiency due to mass production.
- Example: Nike manufactures shoes in low-cost countries like Vietnam and Indonesia, reducing production costs while maintaining high profits.
Access to Natural Resources :
Many MNCs expand to countries rich in natural resources essential for their operations. This helps secure a stable supply and control costs.
- Example: Oil companies like Shell and BP operate in multiple countries to access crude oil reserves.
Competitive Advantage and Global Brand Recognition :
Establishing a global presence strengthens a company’s competitive position by:
- Enhancing brand recognition across countries.
- Outpacing competitors in global market share.
- Differentiating products through technological advancements and innovation.
- Example: Apple maintains a competitive edge through global branding, marketing, and premium technology products.
Risk Diversification :
Expanding into multiple markets reduces dependence on any single country’s economy. This protects companies from risks such as:
- Economic recessions in their home country.
- Political instability affecting local operations.
- Currency fluctuations impacting profitability.
- Example: Coca-Cola operates in over 200 countries, ensuring stable revenues even if one market declines.
Access to Skilled Workforce and Innovation :
Companies expand internationally to recruit talented professionals and leverage expertise available in different countries.
- Example:Google and Microsoft establish R&D centers worldwide (e.g., in India, Canada, and Europe) to hire top tech talent and drive innovation.
Challenges Faced by Multinational Companies (MNCs)
Multinational Companies (MNCs) operate in multiple countries, which presents complex challenges related to management, compliance, culture, and operations.
Political and Legal Challenges :
MNCs must navigate different political environments and legal frameworks in every country they operate in. Challenges include:
- Unstable government policies (e.g., sudden law changes, taxation, trade regulations).
- Strict labor laws and employment regulations..
- Example: Vodafone faced a tax dispute in India, leading to billions in legal battles.
Economic and Financial Risks :
MNCs must deal with multiple economic conditions, inflation rates, and currency fluctuations, which can impact profits. Challenges include:
- Unstable exchange rates affecting international transactions.
- Inflation and recession in different countries.
- Import/export tariffs and trade restrictions.
- Example: The US-China trade war affected companies like Apple and Huawei, leading to higher costs and disrupted supply chains.
Cultural and Language Barriers :
Understanding and adapting to different cultures, traditions, and consumer behaviors is crucial for success. Challenges include:
- Miscommunication due to language differences.
- Consumer preference variations, requiring product customization.
- Cultural misunderstandings affecting marketing strategies.
- Example: McDonald’s had to modify its menu in India to exclude beef-based products.
Ethical and Corporate Social Responsibility (CSR) Issues :
MNCs are often criticized for unethical practices, including:
- Exploiting cheap labor in developing countries.
- Environmental damage (deforestation, pollution, waste disposal).
- Unfair wages and poor working conditions.
- Example: Nike faced backlash for using sweatshops with poor labor conditions in Asia.
Supply Chain and Logistics Issues :
Managing global supply chains is complex due to:
- Long transportation times and delays.
- Dependence on multiple suppliers across different regions.
- Disruptions due to political conflicts, pandemics, or natural disasters.
- Example: Toyota faced severe production delays during the COVID-19 pandemic due to supply chain disruptions.
Taxation and Profit Repatriation Issues :
MNCs struggle with high tax rates, double taxation, and restrictions on profit transfers. Challenges include:
- Tax avoidance investigations by governments.
- Complex tax regulations in multiple countries.
- Repatriation restrictions preventing profit transfers.
- Example:Google and Apple faced scrutiny for using tax havens to reduce corporate taxes.
Managing a Global Workforce :
Handling employees across multiple countries comes with unique challenges, such as:
- Different labor laws in each country.
- Managing remote and diverse teams across time zones.
- Cultural differences in workplace expectations.
- Example: Microsoft and IBM have global teams and must ensure fair labor practices worldwide.
MNCs and Taxation Issues
Multinational Companies (MNCs) face complex tax challenges due to their operations across multiple countries. These tax-related issues often arise due to different tax laws, profit shifting, and international regulations.
Tax Avoidance and Profit Shifting
MNCs often engage in tax avoidance strategies to minimize their tax liabilities. One common method is profit shifting, where companies:
- Move profits to low-tax or no-tax jurisdictions (tax havens).
- Use transfer pricing to artificially lower taxable income.
- Exploit loopholes in international tax laws.
- Example: Apple shifted profits to Ireland, benefiting from lower corporate tax rates, reducing its global tax burden.
Transfer Pricing Manipulation
MNCs use transfer pricing to allocate profits within their subsidiaries. This involves:
- Selling goods/services between subsidiaries at manipulated prices to lower taxable income.
- Shifting revenue from high-tax to low-tax countries.
- Example: Google used transfer pricing strategies to shift profits from high-tax countries to Bermuda, where corporate taxes are zero.
Tax Havens and Offshore Companies
Many MNCs establish subsidiaries in tax havens to benefit from low or no taxes. Characteristics of tax havens include:
- Minimal tax rates on corporate profits.
- Strict confidentiality laws preventing financial disclosure.
- Ease of incorporation with little regulation.
- Example: Facebook, Amazon, and Microsoft have subsidiaries in Cayman Islands, Luxembourg, and Bermuda to reduce taxes.
Double Taxation Issues
MNCs face the challenge of double taxation, where they:
- Get taxed on the same income in two different countries.
- Need tax treaties between nations to avoid excessive taxation.
- Use foreign tax credits to offset double taxation.
- Example: A US-based company earning profits in Germany might be taxed in both Germany and the USA unless a tax treaty applies.
Digital Taxation Challenges
Many MNCs operate digital businesses (e.g., Google, Amazon, Netflix) and face challenges such as:
- Countries demanding taxes on digital services, even without a physical presence.
- Introduction of Digital Services Taxes (DSTs) in the EU, India, and the UK.
- Disputes over tax jurisdiction, as digital businesses operate globally.
- Example: France introduced a 3% digital tax on tech giants like Google and Facebook to tax revenues generated in France.
Base Erosion and Profit Shifting (BEPS) Regulations
To combat tax avoidance, organizations like the OECD (Organisation for Economic Co-operation and Development) have introduced the BEPS framework, which:
- Aims to prevent MNCs from shifting profits to tax havens.
- Introduces global minimum tax rates to reduce tax evasion.
- Requires greater financial transparency and reporting.
- Example: The OECD’s Global Minimum Tax (15%), introduced in 2021, aims to ensure MNCs pay a fair tax rate worldwide.
Foreign Direct Investment & Foreign Portfolio Investment
Previous Year Question
| Year | Question | Marks |
| 2018 | Explain automatic route and Government route by which India gets foreign directinvestment. | 5M |
| 2016 | Differentiate between greenfield foreign direct investment and brownfield foreign direct. | 5M |
| 2016 | Discuss the important features of the recent FDI policy of the Government of India. | 10M |
| 2013 | Differentiate between the role of FDI and FPI for economic development | 5M |
As per the Foreign Exchange Management Act (FEMA), 1999 and the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Government of India:
FDI
- Investment of 10% or more in a listed company. ( Less than 10% Investment is treated as FPI)
- Investment in an unlisted Indian Company ( Irrespective of threshold)
Who can receive FDI?
- Companies, Partnership Firms, Venture Capital Funds, Limited Liability Partnerships (LLPs), Startup etc
Routes-
- Government Route: Application in Foreign Investment Facilitation Portal- Concerned Administrative Ministry/ Department. Proposals of more than Rs 5000 crores are to be approved by CCEA.
- Automatic Route: No Prior approval of the Government or RBI
- NOTE: FDI from a country with which India shares a border is allowed only under the Approval route.
Eligible Instruments
- Shares, Warrants, Fully, compulsorily & mandatorily convertible debentures, Foreign Currency Convertible bonds(FCCBs), Foreign Currency Exchangeable bonds, Depository Receipts
Prohibited Sectors
- Lottery Business, Gambling, and betting including casinos,
- Chit Funds and Nidhi Company, Trading in Transferable Development Rights (TDRs),
- Real Estate Business (Buying/ selling of Land) or Construction of Farm Houses,
- Manufacturing of Cigars,
- Activities/ sectors not open to private sector investment viz.,
- Atomic energy and
- Railway operations
Sectoral Cap
- Composite Cap of all foreign Investment i.e., both FDI and FPI
Note :Once an FDI always an FDI. It means if FDI changes to FPI, it would be continued to be treated as FDI
Data
- Countries attracting the highest FDI: USA ($388.08 billion); China, and Singapore. India- placed at 15th Position)
- Trends :Foreign Direct Investment (FDI) flows to India plummeted by 43 per cent in 2023 to $28 billion amid a global decline of 2 per cent, a report by the United Nations Conference on Trade and Development (UNCTAD). While India dropped to 15th spot in 2023 from 8th position in 2022 in terms of FDI inflows, it remained in the Top-5 for both kinds of FDI — greenfield projects and international project finance deals. In 2022, India’s FDI inflows had risen by 10 per cent to $49 billion.
- Top FDI Sources (upto Sep 2024): Mauritius
- Top FDI Sources ( 2000-2023): Mauritius
- Sectors attracting highest FDI (upto Sep 2024): Services sector (Banking, Insurance)
- States attracting highest FDI Inflows( upto Sep 2024): Maharashtra
The Securities and Exchange Board of India (SEBI) previously defined Foreign Institutional Investors (FIIs) as: “An institution established or incorporated outside India which proposes to make investments in Indian securities and is registered with SEBI under the SEBI (Foreign Institutional Investors) Regulations, 1995.”
Current Status:
- FII as a category no longer exists.
- Now, foreign investments in Indian securities markets are regulated under the FPI (Foreign Portfolio Investors) framework.
According to the Securities and Exchange Board of India (SEBI), Foreign Portfolio Investment (FPI) refers to investments made by non-resident investors in Indian financial markets, including equities, bonds, and other financial instruments, without acquiring significant ownership or control in a company.
Difference between FDI and FPI
| Key Aspects | FDI | FPI | ||||
| Nature of investment | Foreign entities set up operations in India on their own or in partnership with other Indian companies | Foreign entities buy financial instruments such as shares, bonds, government securities, mutual funds, etc. in India | ||||
| Always invest in shares? | Yes, Completely owned or in partnership | Not necessarily, Shares, Bond, G-sec, CP, etc | ||||
| Threshold of Investingin Shares | At least 10% in the Listed companyAny amount in the Unlisted Company | Less than 10% in sharesAny amount in other instruments | ||||
| What it includes | Transfer of Management, Capital, Technology | Transfer of Capital only | ||||
| Ownership (%) | More than 10% | Less than 10% only if invested in share | ||||
| Which Market | Mainly Primary Market | Mainly Secondary Market PFI also through Primary Market | ||||
| Stability and duration | Stable and Long-term | Unstable and Short-term“ Hot Money” | ||||
| Flexibility | It is less flexible as it is not easy to wind up a business | More flexible-easily selling of instruments in the secondary market. | ||||
| Role of investors | Active Participate in management | Passive Rent, interest seeker | ||||
Horizontal FDI
- It involves investment in the same industry or sector in another country. For example, the Apple iPhone may set up a new manufacturing plant in another country.
Vertical FDI
- It entails investment in different stages of production. For example, Apple iPhone may invest in another company that supplies critical components.
Difference between Greenfield FDI and Brownfield FDI
| Key Aspects | Greenfield FDI | Brownfield FDI | ||||
| Nature | The parent company opens a subsidiary in another country or company begins a new venture by constructing new facilities. | When an entity purchases or leases an existing facility to begin new production. | ||||
| Infrastructure | Built from the ground up | Utilizes existing structures and facilities | ||||
| Start up time | Longer start-up time due to construction | Faster start-up as infrastructure is in place | ||||
| Flexibility | Greater flexibility in design and operations | Limited flexibility, adapting existing assets | ||||
| Risk | Higher risk due to uncertainties | Generally considered less risky | ||||
| Cost | Often more expensive upfront | May have lower initial costs | ||||
| Control | Full control over design and implementation | May need to adapt to existing structures | ||||
| Example | Delhi-Meerut Expressway (controlled access highway) is a greenfield project | Tata Motors acquisition of Jaguar Land Rover’s businesses | ||||
Sectoral cap on FDI
| Sector | Cap & Route |
| • Construction, operation, and maintenance of the Railway Infrastructure: High-Speed Trains, Dedicated Freight Corridors, Metro projects, Signalling, and Electrification, | 100%Automatic Route |
| FDI in Agriculture in the following activities only: • Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled conditions; • Development and Production of seeds and planting material; • Animal Husbandry, Pisciculture, Aquaculture, Apiculture; • Services related to agro and allied sectors | 100%Automatic Route |
| FDI in the Plantation Sector– •Tea, Coffee, Rubber, Cardamom, Palm oil, Olive Oil ( FDI in Only these Plantations allowed) | 100%Automatic Route |
| Construction of Development Projects (Townships, Residential/Commercial Properties etc.) | 100%Automatic Route |
| Establishment and Operation of Satellites | 100%Automatic Route |
| Telecommunication | 100%Automatic |
| Cash and Carry Wholesale Trading | 100%Automatic Route |
| E-CommerceInventory Based Model ( Not Permitted)Market Place Model ( Permitted) | 100%Automatic Route |
| Public Sector Banks | 20% Govt route |
| Private Sector Banks, | 74% (Automatic up to 49%)(Govt Route beyond 49%) |
| Insurance and Pension(LIC 20% automatic) | 74% Automatic |
| Multi-brand Retail | 51% Govt |
| Single Brand Retail | 100% Automatic |
| Defense | 100% Automatic |
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