Transnational corporations

Dr Suman Pathak

Transnational Corporations (TNCs)• Transnational corporations sometimes referred to as multinational

companies are those enterprises which operate in more than one country or nation at a time.

• TNCs are those enterprises which manage production and deliver services in more than one country.

• These corporations have offices, branches or manufacturing plants in different countries than where their original and main headquarter is located.

• Thus, any corporation that is registered and operates in more than one country at a time and has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries are referred to as transnational corporations or multinational companies.

Growth, impact

• Globalization, particularly the dismantling of trade barriers, has allowed companies to spread widely in search of cost efficiency and to implement integrated production strategies across regions and even continents.

• Transnational's are made possible by improved international communications which provide rapid containerized transshipment and foreign travel,

• Easy communication of information, and international mobility of capital. • When one market is saturated, the multinational can rapidly develop others, • Foreign investment cut transport costs, and makes possible a rapid response

to local markets. • Transnational's can compare costs at different locations, and can switch

activities to different areas as appropriate.

• Today, TNCs are the major force affecting world-wide shifts in economic activities.

• TNCs have become some of the most powerful economic and political entities in the world.

• TNCs hold nearly ninety percent of all technology and product patents worldwide,

• Involved in 70 percent of world trade. • Approximately, thirty percent of this trade is “intra-

firm”; in other words, it occurs between units of the same corporation.

• The number of transnational corporations in the world has increased to manifold ever since Globalization process started.

• While global in reach, these corporations’ home bases are concentrated in the Northern industrialized countries, where ninety percent of all transnational are based.

• More than half come from just five nations: France, Germany, the Netherlands, Japan and the United States.

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• The United Nations has justly described these corporations as “the productive core of the globalizing world economy.”

• In terms of energy, they mine, refine and distribute most of the world’s oil, gasoline, diesel and jet fuel,

• as well as build most of the world’s oil, coal, gas, hydroelectric and nuclear power plants.

• They extract most of the world’s minerals from the ground. • They manufacture and sell most of the world’s automobiles, airplanes,

communications satellites, computers, home electronics, chemicals, medicines and biotechnology products.

• They harvest much of the world’s wood and make most of its paper. They grow many of the world’s major agricultural crops, while processing and distributing much of its food.

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Transnational Corporations (TNCs) Technology Flows and FDI and

• The growth of TNCs in a globalized era results in rapid development and diffusion of information and communication technology.

• These technologies have had a dual impact: they increase the need and create new opportunities for globalization.

• Of critical importance has been the enabling role played by information technology as it has substantially increased the mobility and dispersion of firm-specific resources and capabilities across national boundaries.

• It also provides greater scope for cross-border linkages that is the integration of dispersed specialized global production networks.

• This has substantially reduced the friction of time and space, both with regard to markets and production:

• a firm can now serve distant markets equally well as local producers;

• It can also now disperse its value chain across national borders in order to select the most cost-effective location.

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• In addition, information technology and related organizational innovations provide effective mechanisms for constructing flexible infrastructures that can link together and coordinate economic transactions at distant locations.

• This has important implications for organizational choices and locational strategies of firms.

• In essence, information technology promotes the development of leaner, meaner and more agile production systems

• That cut across firm boundaries and national borders. The underlying vision is that of a network of firms that enable a global network flagship to respond quickly to changing circumstances, even if much of its value chain has been dispersed.

FDIs

• FDI in its classic form is defined as a company from one country making a physical investment into building a factory in another country and is a measure of foreign ownership of productive assets, such as factories, mines and land.

• Generally, the TNCs own and control production facilities in more than one country through foreign direct investment.

• Foreign direct investment (FDI) is investment of foreign country’s assets into domestic structures, equipment, and organizations of a domestic country. It does not include foreign investment into the stock markets of the domestic country

Conditions for FDIs • FDIs require a business relationship between a parent company and

its foreign subsidiary. • For an investment to be regarded as an FDI, the parent firm needs to

have at least 10 per cent of the ordinary shares of its foreign affiliates. • The investing firm may also qualify for an FDI if it owns voting

power in a business enterprise operating in a foreign country. • FDIs are usually undertaken to strengthen the existing market

structure and explore the opportunities of new markets. • FDIs are also aimed at factors of production which have more

operational efficiency than those available in the home country of the investor.

• FDI activities are also carried out to ensure optimum utilization of natural resources and economies of scale.

Advantage of FDI

• The most important advantage of FDI is that it helps in the economic development of the particular country where the investment is being made.

• This is mainly applicable for the economically developing countries. During the decade of the 1990s FDI was one of the major external sources of financing for most of the developing countries.

• It has also been observed that foreign direct investment has helped several countries when they have faced economic crisis.

• The countries that get FDI from another country also develop the human capital resources by getting their employees to receive training on the operations of a particular business.

• FDI helps in the creation of new jobs in a particular country. • It also helps in increasing the incomes of the working class. • It has normally been observed that FDI allows for the

development of the manufacturing sector of the recipient country.

• FDI assists in increasing the income of the domestic country which is generated from the revenues realized through taxation.

• It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well.

• In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.

• It also opens up the export market that allows these countries the opportunity to cash in on their superior technological resources.

• It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.

• It becomes easier for the business entities to borrow finance at lesser rates of interest.

• The biggest beneficiaries of these facilities are the small and medium-sized business enterprises.

Technology & FDIs• Technology is the most important determinant of competitiveness and the

growth and development of developing countries. • Foreign direct investment permits the transfer of technologies and brings in

advanced technology and skill in a country. • This is done basically in the way of provision of capital inputs. • The importance of this factor lies in the fact that this transfer of technologies

cannot be accomplished by way of trading of goods and services as well as investment of financial resources.

• It also assists in the promotion of the competition within the local input market of a country.

• Through FDI, new research and development activities are also undertaken. • The introduction of new products, processes and organizational technologies

into the affiliates of TNCs in developing countries has raised productivity and contributed to employee training.

• As globalization proceeds and the attraction of FDI therefore, becomes increasingly important for developing countries. Thus, governments of developing countries should act quickly to put in place effective FDI policies. Again, good policies can make a major difference. Governments can induce TNCs to improve the content of their technology transfer by fostering the building up of better domestic skills, capabilities, supplier networks and infrastructure.

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