Private: Company Law Content
Advantages and Disadvantages of MNCs and Nepalese Context
Concept of MNCs and Operational Provision:
- National means one nationality connected with particular nation. Vice versa of this is multinational. It means more than one nationality or including several nationalities.
- Multinational companies mean such companies those are operating in several countries or more than one country.
- Company is an artificial person, incorporation of company gives the birth of company the company where it takes its birth is the nationality of company like a natural person. One company incorporated in one nationality and then transacts in other countries by fulfilling the prescribed legal procedure for operation is the situation of existence of multinational companies.
- The headquarters of Multinational Company normally is based on one country and operates on several countries. Typically MNCs functions with headquarters while other facilities are based in location in other countries.
- Multinational company is referred to as Multinational Business Enterprises (MBE) Transnational Corporation (TNC).
- MNC, MBE & TNC are the same.
- The exact model for MNC may vary slightly. But common model of MNC is the positioning of executive headquarters in one nation, while production, business transaction or other types of facilities are located in one or more other countries. It is the operational system of MNC.
- In this model, the multinational companies take advantage of benefit of incorporation in a particular country. While also being able to produce goods or services or to transact in the geography where the cost of production or service is lower than the incorporating nationality. It is also the way of operation of MNC.
- Another structural model is based on parent and subsidiary company. Parent and subsidiary company also may be MNCs. Parent is based on one nation and operates its subsidiary in other countries around the world. So, the model of operation of MNCs or operational provisions of MNCs may vary.
- One approach to set up an MNC involves the establishment of headquarters in one country that oversees a diverse conglomeration that states many different countries and industries with this model.
- Following on success of corporate model at a national level many corporations have become transnational or growing beyond the national boundaries to attain sometimes remarkable position of power and influence in the process of globalizing.
- Multinational Corporations are important actors in the international system as they are not only major source of investment, trade, and employment but also they exercise considerable influence in economic and social policy of many developing countries in which they operate.
- The United Nation Commission on Trade and Development (UNCTAD) is acting in the field of effects of operation of MNCs in the many countries especially in developing countries.
- The driving force behind business of MNCs is profit motive and free market economy.
From human right perspective;
- MNCs should be held accountable and responsible to the host state or affected community for violation of human rights through appropriate legal regime and mechanism.
- Reciprocity –the company should give something back to society.
- Ethical principle
Kofi Anan Launched a ‘’Compact for New Century” in 1999, which stressed the need for business community to observe the human rights, labor standards and environment protection.
ILO declaration on fundamental principles and rights at work.
- Freedom of association
- Right to collective bargaining
- Elimination of all forms of forced and compulsory labor.
- Abolition of child labor.
The idea of MNC has been around for centuries. Some trace the origin of MNC concept back to Dutch East India Company of the 17th century.
The corporate structure of Dutch East India Company involved a presence in more than one country.
During 19th and 20th century the idea regarding MNC became increasingly common.
In 21st century this business model continues to be highly desirable.
There are several approach that MNC came into existence;
- MNC is to intentionally establish new company with head quarter in one country while producing goods and services in facilities locates elsewhere.
- MNC comes about due to merger b/w 2 or more companies based on different countries.
- Acquisition and hostile takeover also sometimes result in creation of MNC.
Due to the concept of global village, the interdependency in goods and service from one corner of world to another corner is increasingly growing more interconnected each day.
Door for diversification of business.
- Possibility to remain solvent, even one subsidiary is posting to a temporary loss.
- MNC often creates global business strategy that targets emerging markets in countries that offers maximum growth and profit potential.
- Executing a successful multinational strategy can create tremendous value for MNC’S shareholders.
- Global company operates in multiple countries.
- Before becoming a MNC a company may first sell its product or services in foreign countries with limited risk by exporting or licensing its product in that company.
- To expand foreign market, to save on shipping or transportation cost and foreign tariffs the MNCs are establishing or incorporating.
- A company typically becomes a MNC when it makes direct investment in foreign countries to establish operations and conduct business there. That gives the company more control over its business in the country.
A company can setup its operation in a foreign country from scratch by establishing its own manufacturing distribution and retail operation or use several other strategies to build its foreign presence. It can establish branches or partnership with and established firm in a foreign country. It can buy complete ownership or a controlling stake in a foreign country. A company that aims for a larger approach can form a long term global partnership with another company to invest and penetrate multiple foreign markets
Advantages and Disadvantages;
- A MNC benefits from international growth opportunity that may not exist in its home market.
- It may be able to manufacture its products in a foreign country cheaper than it can in its home country.
- MNCs can minimize the effect of foreign currency exchange rate fluctuation.
- MNCs can take advantages of lower tax in foreign country, especially in developing countries.
- The disadvantage is operating in foreign countries poses risk.
- A company is exposed to a country’s law regulations and political environment that can less stable than those in its home country.
- Investors in MNCs can take benefit from their international diversification for example investing in a multinational food company that generates a significant percentage of its profit in other countries gives an investor’s exposure to growth potential of those countries.
Operational provision in Nepalese context
- Section 154 to 158 (Chapter 16) of Nepalese Company Act has mentioned about operational legal provision of foreign company which is related with MNC. The provisions of ;
- Branch office
- Liaison office or contact office
- Registration compulsory
- Incorporation process
- Approval from concerned regulatory, ministry department or regulatory
- Registration fee, determined by notification in Gazette.
- Account and Audit of foreign company
- Power to attorney
- Cancellation or registration and liquidation of foreign company.
- Similarly, Foreign Investment and Technology Transfer Act 2049 (FITT Act) BS also creates space for foreign company.