(d) Adequate delegation of power is given to meet the needs of the host country. (e) The parent company takes decision about expansion, location, recruitment, nature of contract to be maintained. (f) A MNC should have representatives and employees from various countries of the world.
The low developed country has a feeling that presence of subsidiaries of MNCs can have insidious effect on local companies. But certain empirical investigation shows that local companies are benefited by virtue of competition (competition enforces more efficiency to the domestic producers through demonstration effect and changed culture) as well as to those companies who are in tie up arrangement with MNCs. The liberalisation has brought significant changes in the entire spectrum of the economy, particularly in the capital market, money market, banking sector, external sector and industrial sector. There was abolition of Quantitative Restricts in 1990s.
Foreign equity holdings also facilitated by productivity spill over “productivity spill over’s” take place when entry or presence of MNE affiliates leads to efficiency to benefits for domestic firms. There are significant spillover effects from FDI for Indian firms from 1993 to 2000. The importance of spillovers increase with passage of time after economic liberalisation.
Let us now see how the productivity spillover occurs. MNCs impose more competition. The competition compels domestic industries to use their resources in an optimal manner. Local firms also imitate the norms and practices of multinationals. Blomstorm (1986) shows that influence on domestic firms operates through interaction of demonstration effect and competition.
There are other significant impacts of MNCs such as imparting training and skills to the local labours. These labour who join MNCs industries enrich themselves and get better skills. MNCs may indirectly affect efficiency in the host country through transfer of techniques for inventory and quality control that standardise local distribution channels and marketing techniques and may force local firms to increase their managerial efforts. One major gains of the economic reforms phase has been that there has been increased element of competitiveness in the economy, which compels domestic firms to increase their competitive strength. In order to maintain a lively existence a firms has to increase the level of technical efficiency, that too with the foreign firms or a MNC with which the domestic firm enters into collaboration.
The main level of efficiency is generated from technology transfer. Saon Ray in his article entitled MNEs, Strategic Alliances and Efficiency of Firms in EPW, Jan 31, 2004 discusses at length impacts of multinational firms on efficiency of host country. In this article Ray shows apart from technological transfers, domestic firm has not shown any remarkable progress. “This seems to indicate Indian firms are relying more on acquiring best practice knowledge from foreign firms rather than developing it indigenously.” We need to develop the more in-house research facilities, so that our country becomes really technologically enriched. We have also seen while an Indian firm has experienced a passing of ownership to the hands of MNCs, their experienced increase efficiency. Firms could increase efficiency owing to strategic alliance with MNCs. The firms were mostly in technical alliance with foreign firms.
Firms were using capital intensive technologies even through imports. Technology transfers in various forms and phases, dissemination of knowledge and information from parent firms regarding technologies “transfer of brand names, managerial skills, networking with other firms increased the “technical capabilities” of the firms. One ominous sign from the Indian point of view though there has been a profound progress in the performance of Indian Companies but this change has been made possible with linkages of foreign firms. The in house R&D has been neglected. As the more efficient firms learnt, took some time to adopt the process so the question of efficiency came at a late stage. A high level of efficiency was observed in automobiles, electronics, personal care, auto ancillaries, cement and fertilizers.
“In most of these industries, new products have been introduced in this period (1991-2001) and there have been alliances with other firms and countries that have helped these firms to grow.” But industries like paper, steel and textiles did not show similar transformations as there was no substantial change in their paradigms. Saon Ray argues that efficiency was due to import of capital goods which was prohibitive before the period under consideration. Import of raw material and technology had made it possible to augment efficiency. In his empirical study, Ray considered the trends in efficiency of industrial organisations in India in the era of liberalisation. Technical efficiency occurs when there is an optimum allocation of inputs to reach a suitable level of output. A firm is said to be technically inefficient if bundle of inputs employed were larger than minimum required to obtain a defined level of output. In the input based measure, the technical efficiency of the firm is evaluated by the extent to which all inputs could be proportionally reduced without reduction in output.
” With this criterion of technical efficiency for 27 industry groups the average efficiency increased between 1991 to 1996 and after 1996 there has been some improvement. Ray observes improvements took place due to restructuring process of industries, to those organizations with new technologies and skills. Host Country’s producers can also be benefited by developed norms of production process, maintenance of inventories, quality control, distribution channels, and sales management. These are indirect effects and producers learn these techniques through observation and demonstration effect. These effects increase the synergies and initiatives of Local firms.
The management effort straightens and gains new heights. The entry of MNCs in business environment changes the level of competition, matrix of market structure. The increased competition enhances the efficiency.
The technology transfer and diffusion of technology helps greatly to augment efficiency of domestic firms. But Ahluwalia has shown that inefficient firms which do not have new technology have no way of leaving the markets that leads to average inefficiency.