Multinational companies and production across countries
The box of a phone says it was designed in one country and assembled in another, and the parts inside came from several more. When you call its helpline, a person in a different city answers.
A multinational corporation (MNC) is a company that owns or controls production in more than one country. Until the middle of the twentieth century, production was mostly organised within countries, and what crossed borders was raw materials, food and finished goods. MNCs set up offices and factories where they get cheap labour and other resources, so that the cost of production is low and their profit is high.
In the figure : One product, many countries: each step is done where it is best.
Rule 1: An MNC produces in more than one country — It owns or controls production in more than one nation and sets up offices and factories where labour and other resources are cheap.
- Easy : A shoe company has its design office in one country and runs factories in two other countries.
- Medium : A tyre company from one country has plants in India, Thailand and Brazil.
- Exam-type : The aim is to lower the cost of production and earn greater profits.
Rule 2: Production is split into parts and spread across the world — Each step is done at the place that suits it best: design, parts, assembly and customer care.
- Easy : A phone brand designs its model in one country, buys chips from a second country and assembles in a third.
- Medium : A call centre in India answers customers who live abroad, because India has skilled English-speaking youth at lower cost.
- Exam-type : MNCs choose locations for low cost, skilled workers and nearness to markets, and this can save them a large part of their cost.
An MNC produces in more than one country to cut cost and raise profit, and it splits production across the world.
Thinking an MNC only sells goods abroad. It also produces abroad.
Memory clue: MNC — Many Nations, one Company.
Spot the difference
| Point | Till the mid-twentieth century | Present MNC era |
|---|---|---|
| Where production happened | Mostly within countries | Spread across countries |
| What crossed borders | Raw materials, food and finished goods | Also investment, technology and services |
| Example | A colony exports raw cotton and imports cloth | A phone designed in one country, assembled in another, supported from India |
Practice questions
- 1What is a multinational corporation?
- 2What mainly crossed the borders of countries till the mid-twentieth century?
- 3Why do MNCs set up production in other countries?
- 4Name the steps of production that an MNC can spread across countries.
- 5Why do MNCs choose India for call centres?
- 6A shoe company designs in one country and has factories in two others. Is it an MNC? Why?
- 7How does the spreading of production help an MNC earn more?
- 8Explain how production has changed from the earlier period to the MNC era.
Show answers (try them yourself first)
- 1A company that owns or controls production in more than one country.
- 2Raw materials, food and finished goods.
- 3To get cheap labour and other resources, which lowers cost and raises profit.
- 4Design, parts, assembly and customer care.
- 5India has skilled English-speaking youth who can give customer care at lower cost.
- 6Yes, because it controls production in more than one country.
- 7Each step is done where it costs least, so the total cost falls and profit rises.
- 8Earlier production was mostly inside countries and only goods crossed borders; now MNCs split production and spread it across countries.
How MNCs spread and control production
A big car brand opens a plant in India. A local parts maker becomes its supplier. A clothing brand gives orders to hundreds of small workshops and puts its own label on the finished shirts.
The money spent to buy assets such as land, buildings, machines and equipment is called investment. Investment made by MNCs is called foreign investment. MNCs spread production in four ways: they set up their own factories, they set up production jointly with local companies, they buy up local companies and then expand, and they place orders with small producers and sell the goods under their own brand. Through these ways production in distant places gets interlinked.
In the figure : Four ways in which an MNC enters and controls production abroad.
Rule 1: Foreign investment and joint production — MNCs invest in factories and offices abroad. With a local partner, the local company gets money for new machines and the latest technology.
- Easy : An MNC and an Indian company jointly build a plant, and the Indian partner gets modern machines for faster production.
- Medium : A foreign electronics firm and a local firm share a factory, and local workers learn new techniques.
- Exam-type : Any investment is made in the hope that the assets will earn profits.
Rule 2: Buying local companies and giving orders to small producers — The most common route of MNC investment is to buy up local companies and expand their production. Large MNCs also place orders with many small producers.
- Easy : A giant foreign food company buys a well-known Indian oil brand along with its refineries and sales network.
- Medium : A sports brand gives orders to small workshops for footballs and sells them under its own label, deciding the price, quality and delivery time.
- Exam-type : A big MNC can have more wealth than a developing country's government budget, so it has great power over small suppliers.
MNCs use foreign investment to set up factories, join local firms, buy them up or order from small producers.
Thinking that foreign investment always means a new factory. Buying existing companies is the most common route.
Memory clue: J-B-O-N — Joint, Buy, Order, New: four ways of MNC production.
Spot the difference
| Way | What the MNC does | Effect on the local firm |
|---|---|---|
| Joint production | Shares a plant with a local company | Gets money and technology |
| Buying up | Takes over a local company and expands | Loses its ownership |
| Orders to small producers | Buys goods and sells under its own brand | Depends on the MNC's price and quality demands |
Practice questions
- 1What is investment?
- 2What is foreign investment?
- 3Name two ways in which MNCs spread their production abroad.
- 4What is the most common route for MNC investments?
- 5How does a local company benefit from joint production?
- 6How do MNCs control small producers of garments or footballs?
- 7Why does a large MNC have great power over a small supplier?
- 8Explain how production in distant places becomes interlinked through MNCs.
Show answers (try them yourself first)
- 1Money spent on assets such as land, buildings, machines and equipment.
- 2Investment made by MNCs in other countries.
- 3Setting up their own factories, joint production, buying local companies, or placing orders with small producers.
- 4To buy up existing local companies and then expand production.
- 5It gets money for more investment and the latest technology.
- 6They place orders, sell under their own brand and decide the price, quality, delivery and working conditions.
- 7Because it has huge wealth and the small supplier depends on its orders.
- 8MNCs set up factories, partner with, buy up, compete with or order from local producers, so production in far places gets linked.
Foreign trade and integration of markets
A shopkeeper in a small town starts selling imported umbrellas that are lighter and cheaper than the local ones. Within months, most customers ask for the new umbrellas, and the local umbrella maker struggles to sell.
Foreign trade is the buying and selling of goods and services between countries. It gives producers a chance to reach beyond the domestic market, which is the market of their own country, and lets buyers choose from goods produced in other countries. When trade opens, goods move from one market to another, choice rises, and prices of similar goods in the two markets tend to become equal. Producers in the two countries compete closely. This connecting of markets in different countries is called integration of markets.
In the figure : How imports change a local market.
Rule 1: Foreign trade widens the market for producers and buyers — Producers can sell in their own country and also compete in markets abroad. Buyers get a wider choice of goods.
- Easy : An Indian spice maker sells in several countries while buyers at home get imported fruit.
- Medium : A farmer's cooperative exports mangoes and earns more than it could in the local market.
- Exam-type : For a long time trade was the main channel connecting countries, such as the old trade routes linking India with the East and the West.
Rule 2: Imports bring choice, lower prices and competition — When cheaper imported goods enter, buyers gain a greater choice at lower prices, while local producers whose goods sell less face losses.
- Easy : Cheaper imported umbrellas lower prices for buyers and raise sales for the foreign maker, but the local maker sells less.
- Medium : As imports grow, prices of the same good in the two countries come closer, and the two producers compete although far apart.
- Exam-type : Trade thus links markets, but gain and loss are not equal for all: consumers and exporters gain while some local producers lose.
Foreign trade connects markets: choice rises, prices come closer and producers across countries compete.
Thinking that trade benefits everyone equally. Some producers face losses when imports are cheaper.
Memory clue: T-C-P — Trade brings Choice and Price competition.
Spot the difference
| Point | Foreign buyers and producers | Local producers of the same good |
|---|---|---|
| Effect of imports | Cheaper goods, more choice | Sell less and may face losses |
| Prices | Fall for buyers | Pressure to lower prices |
| Result | Markets in two countries are integrated | Must improve quality or lose customers |
Practice questions
- 1What is foreign trade?
- 2What opportunity does foreign trade give to producers?
- 3How does foreign trade help buyers?
- 4What happens to the prices of the same goods in two connected markets?
- 5In the umbrella example, who gains and who loses?
- 6What was the main channel connecting countries in the past?
- 7What is integration of markets?
- 8Explain with an example how foreign trade leads to integration of markets.
Show answers (try them yourself first)
- 1The buying and selling of goods and services between countries.
- 2To reach beyond the domestic market and compete in markets abroad.
- 3It widens the choice of goods beyond what is produced in the country.
- 4They tend to become equal.
- 5Buyers and the foreign maker gain; the local umbrella maker loses sales.
- 6Foreign trade.
- 7Connecting the markets of different countries through trade, so that prices and competition become linked.
- 8Imported umbrellas enter a town, buyers get more choice and lower prices, prices of umbrellas in both countries come closer and both makers compete.
What is globalisation? Technology and trade as its drivers
A designer in Pune can email a drawing to a printer in another country and get the payment in her bank account the same day. Thirty years ago this took weeks by post.
Globalisation is the process of rapid integration or interconnection between countries. It happens through greater foreign trade and greater foreign investment, and MNCs play a major role. More goods, services, investments and technology now move between countries. Movement of people has not increased much because of various restrictions. Technology is one factor behind globalisation: containers, cheaper air transport, and information and communication technology (telecom, computers and the Internet) have made delivery faster and communication almost free.
In the figure : Technology links distant places through transport and communication.
Rule 1: Globalisation means rapid integration between countries — Foreign trade and foreign investment grow, and countries become more closely linked in production and markets.
- Easy : A tailoring firm in India stitches clothes for a foreign brand, while the cloth and machines come from other countries.
- Medium : A software team in India writes programs for a bank abroad and is paid through the Internet.
- Exam-type : Countries can be linked through the movement of goods, services, investment, technology and people, but the movement of people has grown little.
Rule 2: Technology has made globalisation possible — Containers move goods easily between ships, trains and trucks, and cheaper air transport carries more goods. IT lets people send information, mail and money instantly.
- Easy : Goods packed in a container are loaded unopened onto a ship, a train and a truck, which cuts port handling cost and time.
- Medium : A magazine meant for readers abroad is designed in India from instructions sent by Internet, printed and sent by air, and paid through e-banking.
- Exam-type : Without IT, services such as call centres and data entry could not have been done from distant countries.
Globalisation is the rapid integration of countries through trade and investment, helped by technology, especially IT.
Thinking globalisation also means a big rise in the movement of people. It has not risen much.
Memory clue: G = T + I + T — Trade + Investment, helped by Technology.
Spot the difference
| Point | Transport technology | Information technology |
|---|---|---|
| Examples | Containers, cheaper air transport | Telecom, computers, Internet, e-banking |
| What it speeds up | Delivery of goods | Communication and services |
| Result | Faster, cheaper delivery over long distance | Production of services spread across countries |
Practice questions
- 1What is globalisation?
- 2Through which two things is globalisation happening?
- 3Name any three things that move between countries during globalisation.
- 4Why has the movement of people not increased much?
- 5How do containers help trade?
- 6How has information technology helped spread production of services?
- 7Give one example of a service done in India for a foreign customer.
- 8Explain how technology has helped globalisation.
Show answers (try them yourself first)
- 1The process of rapid integration or interconnection between countries.
- 2Greater foreign trade and greater foreign investment.
- 3Goods, services, investments and technology (any three).
- 4Because of various restrictions.
- 5Goods in a container are loaded intact onto ships, trains and trucks, which lowers handling cost and speeds delivery.
- 6Telecom, computers and the Internet let work be sent, done and paid for across countries instantly.
- 7A call centre in India serving customers abroad.
- 8Better transport makes delivery faster and cheaper, and IT makes communication instant and nearly free, so production can be spread across countries.
Liberalisation, trade barriers and the WTO
Suppose the government puts a tax on imported umbrellas. They become costly, fewer are bought, and the local umbrella maker sells more. Now suppose the tax is removed, and the cheap umbrellas flood back.
A tax on imports, or a limit on the number of goods that can be imported (a quota), is a trade barrier. Governments use barriers to increase or decrease foreign trade. After Independence India put barriers on trade and foreign investment to protect its new industries from foreign competition, and allowed only essential imports such as machinery and fertilisers. Around 1991 India removed these barriers to a large extent. Removing restrictions is called liberalisation. The World Trade Organisation (WTO) is an organisation whose aim is to liberalise international trade; it sets rules and sees that they are obeyed.
In the figure : A tax on imports raises their price and protects the local maker.
Rule 1: Trade barriers and why India first used them — A tax on imports or a quota is a trade barrier. India used barriers after Independence to protect young industries from foreign competition.
- Easy : A tax on imported toys raises their price, so buyers shift to local toys.
- Medium : A quota allows only a fixed number of imported cars each year, whatever the demand.
- Exam-type : Industries were just coming up in the 1950s and 1960s, so India allowed only essential imports like machinery, fertilisers and petroleum.
Rule 2: Liberalisation from 1991 and the role of the WTO — From about 1991 India removed barriers on trade and foreign investment so that businesses can freely decide what to import or export and foreign firms can set up here.
- Easy : After liberalisation an Indian trader can import a product freely without a quota.
- Medium : The WTO, started at the initiative of developed countries, has about 160 members and pushes countries to remove trade barriers.
- Exam-type : In practice developed countries have kept barriers, such as large payments to their own farmers, while developing countries were made to remove theirs.
Liberalisation means removing trade barriers. The WTO works for free trade, but its rules are not applied fairly to all.
Thinking the WTO rules are equally followed by all countries. Developed countries have kept protection.
Memory clue: T-Q — Tax and Quota are the two trade barriers.
Spot the difference
| Point | Before 1991 | After liberalisation |
|---|---|---|
| Barriers | High barriers on trade and investment | Barriers largely removed |
| Imports | Only essential items | Goods import and export easily |
| Reason | Protect young industries | Make Indian producers compete and improve quality |
Practice questions
- 1What is a trade barrier? Give two examples.
- 2What is a quota?
- 3Why did India put barriers on foreign trade after Independence?
- 4What is liberalisation?
- 5Around which year did India make big policy changes to liberalise?
- 6What is the aim of the WTO?
- 7Why do developing countries question the WTO's working?
- 8Explain how a tax on imports protects local producers.
Show answers (try them yourself first)
- 1A restriction on foreign trade; for example a tax on imports or a quota.
- 2A limit on the number of goods that can be imported.
- 3To protect new industries from foreign competition.
- 4Removing barriers or restrictions set by the government.
- 5Around 1991.
- 6To liberalise international trade by setting rules and seeing that they are obeyed.
- 7Developed countries have kept protection, while developing countries have been made to remove barriers.
- 8The tax raises the price of imports, so buyers shift to local goods and local producers sell more.
Impact of globalisation in India: who gained
In a big city a family chooses between many car brands, phone models and fast-food outlets. Ten years ago they had a few. Meanwhile, a state sets up an industrial zone with tax holidays to bring in a foreign factory.
Globalisation and greater competition among local and foreign producers have benefited consumers, especially the well-off in urban areas, who get greater choice, better quality and lower prices. MNCs have increased investment in India in industries such as cell phones, cars, electronics, soft drinks, fast food and banking, creating new jobs and helping local suppliers. Some top Indian companies, such as Tata Motors, Infosys and Asian Paints, used the competition to invest in new technology and have become MNCs themselves. To attract foreign investment, governments set up Special Economic Zones (SEZs) with world-class facilities and tax relief for the first five years, and allowed flexibility in labour laws.
In the figure : Competition and investment bring gains to some, and governments try to attract more.
Rule 1: Gains for consumers, MNCs and some Indian companies — Well-off urban consumers get more choice and better quality at lower prices. MNCs invest in products with many well-off buyers, creating jobs and helping local suppliers.
- Easy : A city consumer chooses among many phone models, while a local firm supplying plastic casings to an MNC grows.
- Medium : Indian companies such as Tata Motors and Infosys invested in new technology and now operate worldwide.
- Exam-type : Services like data entry, accounting and engineering design are now done cheaply in India for developed countries.
Rule 2: Steps to attract foreign investment: SEZs and flexible labour laws — SEZs have electricity, roads, water and storage of world standard, and firms pay no tax for an initial five years. Labour laws were relaxed so firms can hire workers flexibly.
- Easy : A foreign firm sets up a factory in an SEZ and pays no taxes for the first five years.
- Medium : A factory hires workers on short contracts only when orders are heavy rather than regularly.
- Exam-type : Governments want foreign investment for jobs and technology, but flexible labour laws reduce workers' security, and SEZs are opposed by some people.
Globalisation brought gains to consumers, MNCs and skilled producers; governments attract investment through SEZs and flexible labour laws.
Thinking all Indians gained equally. Gains were mainly for the well-off, skilled and educated.
Memory clue: C-M-I-S — Consumers, MNCs, Indian companies, SEZs.
Spot the difference
| Who | Gain | How |
|---|---|---|
| Well-off urban consumers | Choice, quality, lower prices | Competition among producers |
| Top Indian companies | Growth, even becoming MNCs | New technology and investment |
| MNCs | Profits and new markets | Investing where buyers are many |
Practice questions
- 1Who has gained most from greater competition in India?
- 2Name two industries in which MNCs have invested in India.
- 3Name two Indian companies that have become MNCs.
- 4What is an SEZ?
- 5What benefits do firms in SEZs get?
- 6Why do governments try to attract foreign investment?
- 7What does flexibility in labour laws mean for a company?
- 8Explain why the benefits of globalisation have not been the same for all.
Show answers (try them yourself first)
- 1Well-off consumers in urban areas.
- 2Cell phones, automobiles, electronics, soft drinks, fast food or banking (any two).
- 3Tata Motors, Infosys, Ranbaxy, Asian Paints (any two).
- 4An industrial zone with world-class facilities for firms that set up production there.
- 5World-class facilities and no tax for an initial five years.
- 6To get investment, jobs and new technology.
- 7It can hire workers for short periods when there is pressure of work, which cuts labour cost.
- 8Educated, skilled and wealthy people used the new chances better, while others did not share the gains.
Small producers, workers and fair globalisation
A small unit makes bulbs. A cheaper imported bulb arrives and the shops stop ordering from it. The owner lays off workers. Meanwhile, a garment worker is now hired on a short contract and has no leave or insurance.
For many small producers and workers, globalisation has posed major challenges. Cheaper imports and MNC brands cut sales of small manufacturers of items like batteries, plastics, toys, tyres, dairy products and vegetable oil, and many units have shut down, causing job losses. Small and medium industries employ about 11 crore workers, next only to agriculture. Under competition, employers hire workers on a temporary, flexible basis with long hours and low wages, and even the organised sector now resembles the unorganised sector. Fair globalisation would create opportunities for all and ensure the benefits are shared. The government, producers, workers and people's campaigns can all help.
In the figure : Competition hurts small producers and workers unless the rules are fair.
Rule 1: Small producers are hit by competition — Cheaper imports and MNC brands reduce the sales of small producers, who have less money for technology, so many units shut down.
- Easy : A small battery maker loses buyers to imported batteries and closes, and its workers lose their jobs.
- Medium : A small television parts maker sees its main clients shift to imported parts at half the price.
- Exam-type : Small producers need better roads, power and information, modern technology and credit at reasonable interest to compete.
Rule 2: Workers face uncertain employment and the call for fair globalisation — Employers cut labour cost by hiring temporary workers, long hours and low pay, so workers lose security and a fair share of the gains.
- Easy : A garment factory hires workers only during the peak season and does not pay for the whole year.
- Medium : A permanent factory worker is now a temporary worker earning less, with no provident fund, health cover or paid leave.
- Exam-type : Government can enforce labour laws, support small producers and bargain for fair WTO rules, and people's campaigns have influenced decisions at the WTO.
Globalisation hurt small producers and workers, so fair globalisation needs government, firms, workers and people to act together.
Thinking that fair globalisation means ending trade. It means sharing the benefits better and protecting people.
Memory clue: S-W-F — Small producers, Workers, Fair rules.
Spot the difference
| Group | Problem | Possible help |
|---|---|---|
| Small producers | Lose sales to cheap imports | Better roads, technology, credit |
| Workers | Temporary jobs, low wages, no security | Enforce labour laws |
| Developing countries | Pressure at the WTO | Negotiate for fairer rules together |
Practice questions
- 1Name two industries where small producers were hit hard by competition.
- 2How many workers do small and medium industries employ in India?
- 3What three things help small producers compete better?
- 4Why do employers prefer to hire workers flexibly?
- 5How does temporary employment hurt a worker?
- 6What is fair globalisation?
- 7How can the government help workers and small producers?
- 8Explain how people's campaigns can help bring fair globalisation.
Show answers (try them yourself first)
- 1Batteries, capacitors, plastics, toys, tyres, dairy products or vegetable oil (any two).
- 2About 11 crore, next only to agriculture.
- 3Better roads, power and information; modern technology; and timely credit at reasonable interest.
- 4To cut labour cost when the pressure of competition is high.
- 5The worker loses job security, benefits and a steady wage.
- 6Globalisation that creates opportunities for all and shares its benefits more fairly.
- 7By enforcing labour laws, supporting small producers, and negotiating for fairer rules at the WTO.
- 8Large campaigns by people's organisations have influenced important trade and investment decisions at the WTO.