Importance and dominance of MNCs, merits and demerits for host and home countries, recent trends and codes of conduct

1. Importance of MNCs

• They carry out most of the world’s foreign direct investment and a large share of world trade, much of it between their own affiliates.
• They are the main channel through which technology and management methods move between countries.
• They organise global value chains, linking producers in many countries.
• They spend the bulk of private research and development money.
• For developing countries they bring capital, exports and jobs.

2. Dominance of MNCs: why and how

MNCs dominate many industries — oil, cars, pharmaceuticals, electronics, soft drinks, software, search and social media.

1. Size and finance: access to capital markets worldwide.
2. Technology: patents and research that local firms cannot match.
3. Brands and marketing: global brands built over decades.
4. Economies of scale and scope across many markets.
5. Managerial skill and global talent.
6. Integration: control over sourcing, production and distribution; internal transfer of goods and money.
7. Political influence in home and host countries.

Dominance is shown by market concentration (a few firms supply most of the world’s smartphones, aircraft or soft drinks), by their share of exports from developing countries, and by the fact that the largest firms’ revenues exceed the GDP of many states.

3. Advantages and disadvantages to the host country

4. Advantages and disadvantages to the home country

Advantages: inflow of profits, dividends and royalties; exports of machinery and components to foreign affiliates; access to raw materials abroad; larger firms that can compete globally; political influence abroad; home-country jobs in headquarters and research.

Disadvantages: loss of jobs when production moves abroad (the US manufacturing debate); fall in domestic investment; imports from foreign affiliates replacing home output; tax loss when profit is booked in low-tax countries; and reputational harm from affiliates’ misconduct abroad.

5. Problems faced by MNCs

April 2024 asked this as a short note: political risk and nationalisation; exchange-rate risk; restrictions on foreign ownership and profit repatriation; differences in law and taxation; cultural differences; criticism by labour and consumer groups; competition from local and emerging-market firms; coordination of a large organisation across time zones; and growing regulation of their tax and data practices.

6. Recent trends

• Rise of emerging-market multinationals: from China, India, Korea, Brazil.
• Services and digital MNCs: firms like Amazon, Alphabet and Meta, whose business crosses borders with little physical presence.
• Asset-light models: control through contracts, franchising and contract manufacturing rather than ownership.
• Supply-chain diversification: China plus one, near-shoring and friend-shoring.
• Tax reform: the OECD/G20 two-pillar agreement, including a global minimum corporate tax of 15 per cent for large groups.
• Responsible business conduct: ESG reporting, supply-chain due-diligence laws in Europe, and in India Business Responsibility and Sustainability Reporting by large listed companies under SEBI rules.

7. Codes of conduct for MNCs

Because no single state can regulate a firm that operates in many, international bodies drew up codes of conduct. Most are voluntary.

1. UN Draft Code of Conduct on Transnational Corporations. The UN set up the Commission on Transnational Corporations and the UN Centre on Transnational Corporations in 1974–75 to draft a binding code. The draft covered respect for national sovereignty and development goals, non-interference in internal politics, abstention from corrupt practices, transfer pricing, taxation, competition, technology transfer, consumer and environmental protection, and disclosure of information, along with fair treatment of TNCs by host states. Differences between developed and developing countries meant it was never adopted; work was abandoned in 1992.
2. OECD Guidelines for Multinational Enterprises (1976; last updated in 2023 as the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct): voluntary recommendations by governments on disclosure, human rights, employment, environment, anti-bribery, consumer interests, science and technology, competition and taxation, with National Contact Points to hear complaints.
3. ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (1977, revised 2017): employment, training, conditions of work and industrial relations.
4. UN Global Compact (2000): ten principles on human rights, labour, environment and anti-corruption, which companies join voluntarily.
5. UN Guiding Principles on Business and Human Rights (2011, the “Ruggie principles”): the state duty to protect, the corporate responsibility to respect, and access to remedy.

Common contents of these codes: obey host-country law and respect its development goals; do not interfere in politics; no bribery; fair transfer pricing and payment of tax; disclosure of information; transfer of technology on fair terms; respect for labour rights, consumers and the environment; and, in return, fair and non-discriminatory treatment by host governments.

Limits: voluntary, no sanctions, and enforcement left to national law. In India, enforcement comes through ordinary law: FEMA and the FDI policy, the Competition Act, 2002, the Companies Act, 2013 (including mandatory CSR spending under section 135), tax law on transfer pricing, and environmental law.

How this is examined

For the host-and-home essay, use the table for the host country and two short lists for the home country, with one Indian example on each side. Dominance answers list the sources of power and then the evidence. For the code of conduct, explain why codes were needed, the five instruments with years, the common contents and the limits.