The TNC is one of the most pervasive types of firms in the global economy. If we define it as a firm with assets or employees in more than one country, there are more than 61,000 companies in the world that qualify as transnational's , and they control around 850,000 subsidiaries worldwide. Some of them are relatively small, and employ fewer than 250 workers. Others are sprawling organizations with more than 250,000 employees scattered across more than 100 countries. The 500 largest transnational's account for about 25 percent of world GDP, and nearly half of total world trade. Transnational's own most of the technology in the world, and they receive about 80 percent of all technological royalties and fees. Transnational's are becoming more important relative to the size of the global economy, about three times as prominent today as twenty years ago. More than 85 percent of all transnational firms are based in the rich countries of Western Europe, the U.S., Canada, Australia, and Japan. During the last decade, new transnational's have emerged from countries such as South Korea, Taiwan, Spain, Mexico, Argentina, and Brazil. It is precisely because of its sheer success around the world that the transnational firm is the subject of close scrutiny and scathing disparagement.
Before 1960 There Was No Specific Theory About Why Firms Become Transnational
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In 1960, Hymer introduced a microeconomic theory of the firm, focusing on international production rather than trade, which Dunning & Rugman (1985) point out as being Hymer's great insight. It considered the key requirements for an individual firm in a given industry to invest overseas and thus become a TNC, including tradable ownership advantages and the removal of competition. The thesis drew influence from Coase's Nature of the Firm (1937), which studied the firm in relation to international activities, and discussing the efficient allocation of assets to dispersed locations.
According to Hymer, monopoly power created by territorial expansion, control in the use of property rights and market imperfections are the main reasons for FDI. He viewed control by the foreign investor not merely as a desire to determine the discreet use of assets but as a strategic move to eliminate competition between the investing enterprise and enterprises in other countries. In addition, international firms operate under the “market imperfections”.
On the contrary, some firms have advantages over others, such as economies of scale, absolute costs, patent rights, and the ability to command large capital and technological resources. Certain firms' enterprises are independent and may be located in different countries. Thus, profits in one country may be up while in other they may be down.
Hymer went on to examine the kind of ownership advantages that firms contemplating FDI might possess or acquire, as well as the kind of industrial sectors and market structures in which foreign production was likely to be concentrated. He was interested in the territorial expansion of firms as a means of exploiting or fostering their monopoly power. He overlooked the fact that an increased profit from the superior efficiency of foreign firms was not necessarily a social loss if the final products were not higher than they would otherwise be.
Hymer emphasized three main factors pertaining to a firm's decision to become a TNC; the possession of oligopolistic advantage, removal of conflict and internalization of “market imperfection”. He went on the phenomenon of “cross investment” – firms in the same industry, but headquartered in different countries, investing in each other's country can be explained as a reaction in an oligopolistic market.
Another important explanation in this subject comes from Vernon's later product cycle studies. In linking TNCs' decisions to monopolistic structures Vernon argues that, TNC can create an oligopoly in the market by using its production and marketing advantages. Technology creation, innovation, cost reduction and cheap labour are the main factors of oligopoly in this competitive market. He identifies three stages of oligopoly as an extension of his earlier studies, namely innovation-based oligopoly, mature oligopoly and senescent oligopoly. This oligopolistic structure reflects to space in three different forms; near the headquarter (innovation stage), in the rival's region (stabilizing the market shares stage) and in the world market (concentration on the international scale).
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Vernon's 1966 analysis of the product life cycle led him to introduce a location aspect to the original four stage process of introduction, growth, maturity and decline. He recognised that in its early stages all elements of the product came from close to the area of its origin, but that as popularity and demand grows this can be spread much further afield, both nationally and globally.
In terms of how this theory impacts on the decision to become transnational, the theory means that as a product moves through its life cycle, as it reaches the maturity stage, a company must find a new market before it goes into major decline, and the move to foreign markets is a logical place to look. This is because foreign markets offer the opportunity to introduce the product, market it to consumers and encourage desire and thus demand, repeating the product life cycle in new regions.
As one region reaches the maturity / decline stage, the company can then move to a new market and begin the process again, thus extending constantly the life of the product and resultant revenue and profits for the transnational company.
Dunning's 1980 eclectic theory and his development of the OLI paragdim is the evolution of three separate theories of what are the most advantageous conditions for a firm to venture into and invest in foreign markets.
The O, L, and I, elements relate to “ownership”, “location” and “internationalisation”.
The ownership element is often intangible, such as brand name, for example McDonalds can open anywhere in the world and will be recognised, technology, such as Apple or Microsoft. Application and usage of this advantage will result in either higher revenues or lower costs which will cancel out the additional costs of operating in another country such as poor local knowledge, legal, institutional or cultural diversities, and the logistics of communicating and operating from a distance.
The location or country specific advantage can be split into 3 sections, economic, political or social and may change over time but when looked at with the “O” and “I” elements of the theory provide a solid advantage. Economically this may be production costs, transport infrastructure, size and potential of the consumer market, Politically, the advantage may be in the form of governmental policies to attract foreign investment and production and socially may be new attitudes towards development of foreign trade. Again, a good example of this is the eastern bloc countries, particularly those that were formally under Communist rule but are now developing as consumer bases for new products and whose governments are encouraging foreign investment to held build up the economy of the country.
The final component is the internationalisation advantage. When considering entry to a new country, an organisation can either do this through takeover of a subsidiary or through collaborative working with existing firms. Generally this becomes an advantage when a market does not exist but there is potential to develop and grow sales of the product or service, for example introducing the mobile phone and technology market to India caused a massive growth in telecommunications in the country which has led to its becoming a major consumer in this market sector.
Much of the research done after that time, were refinements or extensions of the concepts of oligopoly and internalization. Kindleberger, Vernon and Caves are best-known to have expanded the “Monopolistic advantage” aspect of Hymer's theory. They have asserted that foreign investment presupposes some degree of monopoly advantage; firms entering new market, must have some advantages over local firms in order to overcome the disadvantages that they have in being forced to operate in a new environment. (
The main idea in monopolistic advantage aspect is that there exist natural disadvantages for a foreign firm operating outside its country of origin: language, cultural and other related problems. Accordingly, for a firm still is able to take overseas activities through FDI, it must be case that the firm possesses the advantage which indigenous firm do not. Technology, knowhow, management and liquidity-related advantages could thus be exploited in order to overcome the inherent disadvantages of FDI and make contemplated overseas operations more attractive.
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On the positive side, there is increased foreign investment and export income which has the effect of increasing a country's balance of payments; this is one of the reasons why developing countries are keen to attract foreign investment and will actively encourage the arrival of transnational corporations. However, much of profits made by the firm will be returned to their home country and if the market is seen to impinge on the market share of the parent company export restrictions may be imposed which then has a negative effect on the host country's balance of payments.
In addition, the firm will introduce goods that may not have previously been available in the host country, for example, McDonalds, Sony or Apple which will have the effect of diversifying production and encouraging the development of domestic services to support the arrival of the new products. (Dunning & Hamdani, 1997) This may also be a negative, as was seen with the case of Nestle infant formula in Africa which is a prime example of inappropriate products being introduced to a host country and affecting consumption patterns in a very negative way. (Zelman, 1990).
A further benefit often cited by transnational corporations for the benefits of entering a host country is that they can increase productivity and provide skills training to local workforces, however this needs to be weighted against the potential unemployment that may ensure following the introduction of labour saving technology and processes. In the context of employment, whilst many transnational firms will pay higher wages than local firms, this can cause a widening of the gap between rich and poor in a host country and create a situation such as that seen in Singapore where there is one group who are able to purchase a high level of consumer goods but another group are unable to find work to pay for even the basics. (Madeley, 1999).
An often cited effect is the stimulation of local entrepreneurship as multinational corporations subcontracting some of their operations to local industries and foster a competitive environment. However, there are restrictions often placed, such as materials being purchased from the parent company, even when the domestic supplies are cheaper, which impacts on the potential profit margins available to local suppliers and can cause problems for local producers of the same goods. (Chew & Yeung, 2001).
This use of local suppliers and subcontractors can also lead to them benefiting from introduction of new technologies and the promotion of new industries, however the payback is often in the form of restricted patents and technical knowledge to the local operators as was the case with Coca Cola in India.
The other two issues centre around revenues and production, with transnational companies providing a source of tax revenue for the host government although they will frequently require tax concessions or subsidies as a carrot for their foreign investment and adjusting prices in favour of their own subsidiaries and operations in other countries.
Finally multinational corporations may bring in specialisation of production processes which aids the countries economies of scale, making exports more profitable and competitive and raising the national income. The potential downside to this effect is that investment in domestic industry is neglected in favour of attracting foreign capital into the region and if the multi-national then pulls out the host country is left further behind in its development. (Baldwin & Winters, 2004)
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Hymer, S.H. – The multinational corporation and the law of uneven development.
Kindleberger, C. – American Business Abroad.
Coase , R. – Nature of the Firm.
Vernon, R. – The Product Lifecycle.
Caves, R.E. – International Corporations: The industrial economics of foreign investment.
Rugman, A.D. – New Theories of the Multinational Enterprise.
Baldwin, R.E. and Winters, L.A. - Challenges to Globalization Analyzing the
Chew & Yeung – The internationalization of small firms: a strategic entrepreneurship.