MULTINATIONAL /TRANSNATIONAL CORPORATIONS (MNCs/TNCs)

A multinational corporation (or transnational corporation) (MNC/TNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Both maintain management headquarters in one country, known as the home country, and operate in several other countries, known as host countries.The terms TNC and MNCs here are used interchangeably although the two are distinguished as follows.

TNC has been technically defined by United Nations Commission on Transnational Corporations and Investment as ‘enterprises which own or control production or service facilities outside the country in which they are based.Transnational companies (TNC) are much more complex firms. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market. Most of them come from petroleum, I.T. consulting, pharmaceutical industries among others. Examples are Shell, Accenture, Deloitte, Glaxo-Smith Klein, and Roche.

Multinational companies (MNC) have investment in other countries, but do not have coordinated product offerings in each country. They are more focused on adapting their products and service to each individual local market. Well-known MNC’s are mostly consumer goods manufacturers and quick-service restaurants like Unilever, Proctor & Gamble, Mc Donald’s and Seven-Eleven.

Transnational corporations (TNCs) are a distinctive feature of international political economy. TNCs compete in regional and global markets and engage in foreign direct investment that is much sought after by national governments seeking jobs, technology, and the resources for economic growth. Perceptions of TNCs have evolved as IPE has changed over time; they have been perceived as agents of capitalist imperialism, tools of US hegemony, and state-level actors engaged in ‘triangular diplomacy’. International trade, global finance, national security, and knowledge and technology are all affected by TNCs and the competition among them in regional and global markets.

There are common factors associated with TNCs:

TNCs are

·       Gigantic business organizations that dominate production, investment, and employment worldwide, they control global markets.

·       Invest in less developed countries to exploit their cheap labor and natural resources. They gain and the countries of the South lose as natural resources and cheap labor-intensive commodities are traded for manufactured goods produced in the North

·       So large that they dwarf all but a few states. They are the most powerful actors in the world today

The rise of TNCs

According to UNCTAD, the total amount of inward FDI flows increased from an average of about $225 billion worldwide in the period 1990-1995 to nearly $1.5 trillion in 2000 and falling to $648 billion in 2003. This drop in FDI is a result of various factors including economic recession and falling stock markets. UNCTAD identifies three forces driving this transnational market growth:

·       Policy liberalization

·       Technological change

·       Increasing competition

Many LDC governments have adopted the ‘Washington Consensus’ policies that facilitate open trade and free capital mobility. These policies create a more conducive environment for TNCs to invest. Countries entering the main regional economic groups –NAFTA and the EU- adopt liberal trade and investment rules. China’s entry into WTO accelerated inward FDI flow. India and japan that have been slow to abandon mercantilist policies are disadvantaged in the competition for FDI resources. Technological advances have also enhanced FDI by reducing transportation and communication costs. Unlike the first TNCs that benefited from monopoly power, most TNCs today are driven to invest abroad by the competitive environment found in transnational markets, the policy liberalization that encourages that competition, and the technological changes that make foreign investment more efficient.

Patterns of TNCs

Contrary to the belief that most TNCs are North based businesses that have shifted production to the LDCs in the South taking advantage of cheap labor or natural resources, most TNCs are North-North and an emergent South-North TNC activity as firms in NICs enter global markets and acquire foreign business assets. TNCs mainly invest the high-wage North and less in the low-wage developing countries in the South. This is because this is where the transnational markets are and since the North countries have advanced technology and skilled workers whose high wages are matched by their high productivity.

A great deal of FDI is regionally based, flowing out of countries in the EU into other EU countries and out of countries in the NAFTA and into other NAFTA countries. Although markets for some commodities such as petroleum are global, much recent market growth has been regional. TNCs tend to evolve and expand to compete in particular markets hence the explanation as to why market growth has remained largely regional.

What determines where TNCs invest?

1.     Product cycle theory: in the first stage of the product cycle, according to Raymond Vernon, a factory in a high income country identifies a need that can be satisfied with a technologically sophisticated product. It thus invests in product development and production to develop products to satisfy a home-country need. Once the product is developed and a market created at home, it is then exported to other countries. At this point the firm becomes multinational or transnational. Once the technology has become standardized, the product may now be produced more efficiently in a NIC. At this point the production moves abroad and the TNC makes a foreign investment.

2.     Appropriability theory: Richard Caves -argues that some firms become TNCs because they have too much to lose if they enter into partnerships or licensing agreements with foreign firms which might in fact appear more profitable in terms of simple dollars-and-cents calculation. The fear is that these advantages or technological innovations will be stolen, copied, or otherwise ‘appropriated’ by the competition if the firm does not retain full control over them. The only way to ensure that key competitive factors are protected is to keep full control of the process. This means foreign direct investment when entering foreign markets, creating wholly-owned subsidiaries.

3.     TNCs and underdevelopment: Stephen Hymer- TNCs sometimes exist to protect and exploit unique advantages –such as those factors that might give them monopoly power and the ability to earn excess profits. Hymer argues that the desire to retain monopoly power and also exploit foreign markets caused TNCs to engage in patterns of FDI that do not foster economic development, but rather lead to the ‘development of underdevelopment’. Fearing that their competitive assets will be appropriated, executives in corporate headquarters tend to keep control of them at home and be sure that strategic decisions are made by home-country and not host-country, executives. This creates a branch factory syndrome, in that critical technology and the most productive assets remain securely at headquarters, while inferior technology and less productive assets are transferred abroad to the branch factory. Although FDI will build factories and create jobs as in this case, the technology will always be inferior and the jobs will never be as good as in the headquarters firm.

4.     Politics and protectionist barriers: TNCs depend on the ability to import and export. Trade barriers make their internal operations less efficient and disadvantage them as compared with the domestic protected firm. The lower trade and investment barriers within the regional blocs encourage intra-bloc FDI compared with other patterns of FDI. Sometimes, FDI is an unintentional result of mercantilist policies designed to keep out foreign products. A foreign firm can get around a tariff barrier by establishing a domestic factory and thus becoming a domestic firm. In the US-Japan auto agreement case, a policy that was intended to keep out foreign cars instead attracted foreign FDI and strengthened the Japanese firms.

5.     Currency stability: TNCs are especially susceptible to the effects of unstable foreign exchange rates because they often have costs that are denominated in one group of currency and earn revenues in other currencies. An unexpected shift in the exchange rates can raise effective costs and reduce the value of the revenues. One way of cushioning such is through establishing production facilities in each major market so that costs and revenues accrue largely in the same currency. This factor drives TNCs to operate like national firms. The combination of trade barriers and exchange rate factors encourages firms to produce goods in the countries where they are sold rather than simply exporting from a central location. When a currency is overvalued, imported products are less expensive than domestic goods. This serves as a strong incentive for firms to invest in foreign production facilities. E.g in the US in the 1980s the dollar was overvalued and this encouraged US firms to set up offshore production facilities. In Japan in the late 1980s as well the yen was overvalued; this endaka effect was to force Japanese firms to set up production units throughout South East Asia and East Asia and to cut costs at factories in Japan.

6.     Location specific advantages: sometimes FDI is influenced by location-specific advantages. Such could be access to natural resources, or where the best people are (eg in IT technology) set up shop where other firms are also located so as to benefit from a pool of highly trained individuals in that area.

7.      Competition: sometimes competitive pressure pushes TNCs to invest abroad. If our firm does not contest this market, other firms will and they may gain an advantage from doing so.