MNCs: why and how production spreads across countries

Detail

1. What is an MNC?

• A multinational corporation (MNC) is a company that owns or controls production in more than one nation.

• "Controls" matters. An MNC can direct production that it does not own, for example through outsourcing orders (Route 3 below).

• MNCs move in both directions:

• Foreign MNCs come into India, for example Ford, Cargill and McDonald's.
• Indian firms also become MNCs abroad, for example Tata Motors and Infosys.
• Example of an Indian MNC buying abroad: Ford sold Jaguar and Land Rover to Tata Motors in 2008 [6].

2. Era context: from protection to opening

• 1950s–1980s (protection): India put up barriers to foreign trade and foreign investment. The aim was to protect young Indian producers from foreign competition. MNCs had little room to operate.
• 1991 (opening): under the New Economic Policy, the government removed many barriers on trade and investment. MNCs could now set up in India more easily, and Indian firms could go abroad.
• Present:
• Most sectors are open to 100% FDI under the automatic route. FDI (foreign direct investment) means a foreigner investing in and controlling a business in India. The automatic route means no prior government approval is needed. Only some strategically important sectors are kept out [4].
• More than 90% of FDI inflows come through the automatic route [4].
• Cumulative FDI inflows (the total received over the period) crossed US$1 trillion between April 2000 and September 2024 [3].
• FDI inflows were US$81.04 billion (provisional, FY 2024-25), up from US$71.28 billion (FY 2023-24) [2].
• Worked example: (81.04 − 71.28) ÷ 71.28 × 100 = 9.76 ÷ 71.28 × 100 ≈ 13.7%, which rounds to the reported ~14% growth [2].

3. Why MNCs choose a location (Class 10)

MNCs set up production where they get:

• Closeness to markets, so selling and transport are cheaper and faster.
• Skilled and unskilled labour at low cost.
• Other factors of production assured, such as land, power, water and raw materials.
• Government policies that look after their interests, such as easy rules, tax benefits and freedom to repatriate profits (send profits back to the home country).
• Aim: lower cost of production and higher profits.
• Present-day evidence of these pulls in India (FY 2024-25):
• Top source countries: Singapore 30%, Mauritius 17%, USA 11% [2].
• Top states: Maharashtra 39%, Karnataka 13%, Delhi 12%. These states have big markets, infrastructure and skilled workers [2].
• Top sectors: services 19%, computer software and hardware 16%, trading 8%. This matches India's advantage in skilled, English-speaking labour [2].

4. NCERT case: the industrial-equipment MNC

Stage	Location	Why there
Design	Research centres in the US	Research capability
Components	China	Cheap manufacturing
Assembly	Mexico, Eastern Europe	Close to US and European markets
Customer care	Call centres in India	Skilled engineers, educated English-speaking youth

• Possible result: 50-60% cost savings.

• Worked example: if making the product in one country costs ₹100 crore, a 50-60% saving brings the cost down to ₹40-50 crore.

• The production process is "divided into small parts and spread out across the globe". This is the seed of the global value chain (GVC) idea (Section 8).

• A GVC is when the different stages of making one product (design, parts, assembly, service) take place in different countries.

• The GVC picture today:

• GVCs account for about 70% of international trade. Parts and services often cross borders many times before the final product is ready [5].
• GVC-linked trade was about 17% of global GDP (2024). GVCs stayed at record highs in 2024, despite the pandemic and geopolitical shocks [5].
• MNCs make up more than half of global exports once the exports of their foreign affiliates (branches and subsidiaries abroad) are counted [5].
• Foreign affiliates' domestic sales plus exports reached US$25.6 trillion (2023). This is close to the total value of world trade [5].

5. Key terms

• Investment: money spent on assets such as land, buildings and machines, in the hope of earning profit.
• Foreign investment: investment made by MNCs.
• Power of MNCs: many top MNCs have wealth greater than the entire budgets of developing-country governments. This gives them strong bargaining power over host governments.
• Home countries: nearly all major MNCs were historically American, Japanese or European, for example Nike, Coca-Cola, Pepsi, Honda and Nokia.
• Reason: capital, technology and brands built up in the economies that industrialised early.
• Today some MNCs come from emerging economies, for example Tata and Infosys from India.

6. Routes by which MNCs set up, control or produce abroad

Route 1: Joint production with local companies

• The MNC and a local firm produce together. The local partner gains in two ways:
• Money for more investment, such as new machines for faster production.

• The latest production technology, i.e. technology transfer: technology, know-how and skills moving from one firm or country to another.

• Example: Ford + Mahindra and Mahindra (see Section 7).

Route 2: Acquisition of local companies (the most common route; Class 10, Ex. 13(ii))

• An acquisition means buying a local firm and then expanding it.
• Cargill-Parakh case: the US MNC Cargill Foods bought Parakh Foods. With the purchase, Cargill got:
• A well-reputed brand.
• A nationwide marketing network.

• Four oil refineries.

• Result: Cargill became India's largest edible-oil producer, with capacity for 5 million pouches daily.

• Lesson: buying a local firm is faster than building from scratch, because the brand, the network and the plants come ready-made.

Route 3: Outsourcing to small producers

• Outsourcing means a company gets work done by outside firms, often in other countries, instead of doing it itself (Class 11).
• Large MNCs place orders for garments, footwear and sports goods with many small producers around the world. They then sell these goods under their own brands.
• The MNC decides the price, quality, delivery and labour conditions. So the MNC controls production without owning the factories.
• NCERT image: jeans made in developing countries sell in the USA for ₹6,500 (US$145). Most of that value goes to the brand, not to the small producer.

Route 4: Competing closely with local firms, or using them as suppliers

• All four routes interlink production across distant locations.

7. Ford India case (Class 10 box)

• Ford is a US MNC with production in 26 countries.
• It came to India in 1995. It invested ₹1,700 crore in a plant near Chennai, together with Mahindra and Mahindra (Route 1).
• By 2017:
• 88,000 cars were sold in India.

• 1,81,000 cars were exported to South Africa, Mexico, Brazil and the USA.

• MNC-controlled trade: Ford exports cars and components to its own factories in other countries. So a large part of this "trade" happens inside one company.

• Since then:
• 2021: Ford stopped making cars for India.
• Its Sanand (Gujarat) plant was sold to Tata Motors, completed in 2023.

• The Chennai plant is being revived for export manufacturing, starting with engines (verify current).

• Lesson: an MNC's choice of location keeps changing as markets and costs change. An MNC that comes in can also leave.

8. Glocalisation

• Glocalisation means adapting global products or strategies to local tastes, cultures and rules.
• Example: McDonald's in India does not sell beef or pork, and it sells the McAloo Tikki.
• Why it matters: being "close to markets" (Section 3) means more than physical distance. The MNC must also fit local culture.

Prelims Hooks

• MNC = a firm that owns or controls production in more than one nation. It does not have to own the factories: outsourcing-based control also counts.
• Most common route for MNC entry (NCERT) = buying local companies. Example: Cargill bought Parakh Foods, with 4 refineries, and became India's largest edible-oil producer (5 million pouches daily).
• Technology transfer = the local partner's gain in joint production, not in outsourcing.
• Ford India: entered 1995, ₹1,700 crore, near Chennai, partner Mahindra and Mahindra. Sanand plant went to Tata Motors (2023).
• FDI FY 2024-25 = US$81.04 bn (provisional). Top sources: Singapore (30%) > Mauritius (17%) > USA (11%). Top state: Maharashtra (39%) [2].
• Cumulative FDI since April 2000 crossed US$1 trillion (up to September 2024) [3]. More than 90% of FDI comes through the automatic route (no prior government approval) [4].
• GVCs ≈ 70% of world trade [5]. Trap: the 70% share belongs to GVCs, not to MNCs. MNCs account for more than half of global exports [5].
• Glocalisation = adapting a global product to local tastes. Example: McAloo Tikki.
• NCERT industrial-equipment case: design in the US, components in China, assembly in Mexico and Eastern Europe, customer care in India, giving 50-60% cost savings.

Mains Points

• Location is a policy choice, not an accident.
• MNCs pick a place for markets, cheap skilled labour, assured inputs and friendly policy.
• The 1991 opening and the automatic route (more than 90% of FDI) [4] turned India from a protected economy into an FDI destination worth US$1 trillion cumulatively (April 2000 to September 2024) [3].

• The Ford exit in 2021 shows that policy must also make the country "sticky", so that investors stay after they come.

• Gains vs control: each route benefits local firms differently.

• Joint production brings money and technology transfer.
• Acquisition (Cargill-Parakh) can concentrate market power in the MNC's hands.
• Outsourcing gives small producers orders. But the MNC sets price, quality and labour conditions, and keeps most of the value (₹6,500 jeans).

• Useful for GS-III answers on FDI quality versus quantity, and on competition policy.

• GVC integration is India's opportunity.

• GVCs make up about 70% of world trade and were at a record high in 2024 [5].
• India's FDI goes mostly to services and software (35% together, FY 2024-25) [2]. This fits its role as the "customer care" link in the NCERT case.

• The next step is manufacturing links (components and assembly), which is what Make in India aims for.

• Where FDI comes from and where it goes is skewed.

• Singapore and Mauritius together give 47% of FDI (FY 2024-25). Part of this is money routed through these countries because of tax treaties [2].
• Three states (Maharashtra, Karnataka and Delhi) get 64% [2].
• So FDI can deepen regional inequality, which links to GS-II federalism and balanced growth.