FACULTY OF LAW JAMIA

MILLIA ISLAMIA
International Trade and Finance

Transnational
Corporations
By
Abhishek Gupta
BA LLB (H) 5th Sem

ACKNOWLEDGEMENT

I would like to thank my teacher Dr Sajid Z. Amani for being a

great teacher and for giving me support and guidance regarding
this assignment. . I would also like to thank my friends and peers
for

their

encouragement

throughout

the

making

of

this

assignment.

Abhishek Gupta

Contents:
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 Meaning of TNC
TNC in world economy
The growth of TNC
Factors
Advantages
Disadvantages
Indian Scenario
Bibliography

Meaning of TNCs
According to Peter F. Drucker, TNC is "the most important and most visible
innovation of the post-war period in the economic field." Ingo Walter says relating to
the relevance of TNCs to the subject of international trade thus: "All of the issues we
have examined-trade theory, commercial policy, foreign exchange and the balance of
payments, and the international economics of development-are profoundly influenced
by the MNCs, which actually do on a transnational basis all of the things that concern
the international economic and financial position of national states. They do them
quickly, efficiently and this is where many of the MNCs costs and benefits to the
international economy lie."
The TNCs are also known as multinational corporations/enterprises, global
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corporations, international corporations/enterprises/firms. But there is a distinction

between the multinational corporation and transnational corporation. "Multinational
corporations are usually organised around a national headquarters, from which
international control is exercised-they still have a national identity, even though their
subsidiaries may not always care to allow that identity to obtrude in the markets they
serve." A TNC is a multinational ".....in which both ownership and control are so
dispersed internationally." The term global corporation means more or less the same
thing as the transnational corporation.
According to some, global corporation is one which views the entire world as a
single, homogeneous market which should be centred to by globally standardised
products. Theodore Levitt says, while "The multinational corporation operates is a
number of countries and adjusts its products and practices in each-at a high relative
cost", "...the global corporation operates with resolute constancy-a low relative cost-as
if the entire world (or major regions of it) were a single entity, it sells the same thing
to same way everywhere." The terms, "multinational corporation" (MNC), the
"transnational corporation" and global corporation" and international corporations are
synonymously used at present though the following distinction can be made:
International Corporation (IC): The international company conducts the
operations (exporting, producing) in one or more foreign countries, but with domestic
orientation. The company believes that the practices adopted in domestic business, the
people and the products of domestic business are superior to those of other countries.
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This company extends the domestic product, domestic price, promotion and other
business to foreign markets. A company with manufacturing investment (or service
corporation) in at least one foreign country may be regarded as an international
corporation.
The MNC responds to specific needs of the different country markets regarding
product, price and promotion. Thus, MNC operates in more than one country, but
operates like a domestic company of the country concerned.
Global corporation produces in home country or in a single country and focuses
on marketing these products globally or produces the products domestically.
The TNC produces, markets, invests and operates across the world.
Definitions of Transnational Corporation (TNC)
Jacques Maisonrogue, president (previous) of IBM World Trade Corporation defines
an MNC (TNC) as a company that meets five criteria:
1) It operates in many countries at different levels of economic development.
2) Its local subsidiaries are managed by nationals.
3) It maintains complete industrial organisations, including R and D and manufacturing
facilities, in several countries.
4) It has a multinational central management.
5) It has a multinational stock ownership.
The term 'transnational corporation' generally refers to a corporation with
affiliated business operations in more than one country. A more specific definition
deems an enterprise a transnational corporation if "it has certain minimum size, if it
controls production or service plants outside its home state and if it incorporates these
plants into a unified corporations strategy". Yet another definition defines a TNC as "a
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cluster of corporations of diverse nationality joined together by a common ownership

and responsible to a common management strategy."
As per the Year Book of World Affairs, 1983, transnationals may be defined as
large business corporations controlled predominantly by nationals of the country in
which their headquarters are situated, but with operating activities spread across many
different countries, employing tens of thousands of people.
The UN Code of Conduct for TNCs defined it as "an enterprise, whether of
public, private or mixed ownership, comprising entities in two or more countries,
regardless of the legal form and fields of activity of these entities, which operates
under a system of decision-making, permitting coherent policies and a common
strategy through one or more decision-making centres in which the entities are so
linked, by ownership or otherwise, that one or more of them may be able to exercise a
significant influence over the activities of others, and, in particular, to share
knowledge, resources and responsibilities with others."
According to UN "Norms and Responsibilities of Transnational Corporations
and Other Business Enterprises with Regard to Human Rights, 2003, the term
'transnational corporation' refers to an economic entity operating in more than one
country or a cluster of economic entities operating in two or more countries-whatever
their legal form, whether in their home country of activity and whether taken
individually or collectively".
Another common term used is 'multinational corporation or enterprises' which
would also include the incorporated entities, such as partnerships and joint enterprises.
The International Labour Organisation (ILO) Report observed, "the essential
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nature of the multinational enterprises lies in the fact that its management
headquarters are located in one country (referred for convenience as the home
country), while the enterprise carries out operations in a number of other countries as
well ('host countries'). Obviously, what is meant is a corporation that controls
production facilities in more than one country, such facilities having been acquired
through the process of foreign direct investment. Firms that participate is international
business, however large they may be, solely by exporting or by hunting technology
are not multinational corporations."
The ILO's Tripartite Declaration of Principles Concerning Multinational
Enterprises and Social Policy defines a multinational enterprise to include
"enterprises, whether they are of public mixed or private ownership, which own or
control production, distribution, services are other facilities outside of the country in
which they are based." The Declaration further states that "....this Declaration does not
require a precise legal definition of multinational enterprise, but the foregoing
definition is designed to facilitate the understanding of the Declaration and not to
provide such a definition."
The Organisation for Economic Cooperation and Development (OECD)
similarly defines multinational enterprises in its Guidelines for Multinational
Enterprises thus: "These (multinational enterprises) usually comprise companies or
other entities established in more than one country and so linked that they may coordinate their operations in various ways-ownership may be private, State or mixed."
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Thus, A Multinational or transnational enterprise is an enterprise that engages in

foreign direct investment (FDI) and owns or controls value-adding activities in more
than one country.

The definition, which is accepted by the United Nations Conference on Trade and
Development (UNCTAD) includes a specific requirement regarding the share of
assets controlled by the parent enterprise.
Transnational corporations are incorporated or unincorporated enterprises
comprising parent enterprises and their foreign affiliates. A parent enterprise is
defined as an enterprise that controls assets of other entities in countries other than
its home country, usually by owning a certain equity capital stake. An equity capital
stake of 10% or more of the ordinary shares or voting power for an incorporated
enterprise, or its equivalent for an unincorporated enterprise, is normally considered
as an threshold for the control of assets.

Bornschier and Chase-Dunn (1985, p. xii) provide the following definition:

1. They are business firms producing commodities or services for profit.
2. They are organizational entities with a single division of labor under the
effective control of a centralized hierarchy.
3. Organizational subunits are located and operating in different countries.
4. These corporations are among the leading firms in the countries where they are
active.

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TNCs in the world economy

TNCs play an important role in world trade and investment. For example in the US
half of the imports can be regarded as transactions between branches of TNCs, that is,
the seller and buyer are presumably owned and controlled by the same firm. Globally
about half of all foreign trade can be accounted to intra-firm trade, while the share for
overall foreign trade where TNCs are involved is estimated to be even larger at about
two third. That is, as the World Investment Report (WIR) from 1995 points out,
international production by TNCs increasingly influences the size and nature of cross
border transactions, while this process shapes the nature of the world economy. TNCs
have become the central organizers of economic activities and major actors in shaping
the international division of labor. Table 1.1 provides an overview over some keyindicators for international production. International production denotes the
production of goods and services in countries that is controlled and managed by firms
headquartered in other countries. Outward FDI stock and global sales of foreign

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affiliates are thereby two generally accepted proxy indicators of international

production.
TABLE 1.1

Year

1990

1995

2001

TNCs

35000

40000

65000

Foreign

Total

Sales of World

Affiliates

FDI

foreign

outward

affiliates

Employees

exports

150000

stocks
US$ 1.7 US$ 4.4 US$

270000

trillions
trillions
trillions
US$ 2.7 US$
7 US$
5.8 -

850000

trillions
trillions
trillions
US$ 6.6 US$ 19 US$
trillions

trillions

2.5 24 millions

8 54 millions

trillions

The data reveals that between 1990 and 2001 the number of TNCs nearly doubled and
that the number of foreign affiliates increased more than fivefold. Sales of foreign
affiliates are more than twice as large as world exports in 2001. A decade earlier
differences were significantly less. These figures reflect a trend which started decades
earlier, but considerably increased since the eighties. TNCs have been present since
the nineteenth century but they grew in significance in the 1950s. Their growth is
merely a consequence of a set of economic conditions. Particularly US-based TNCs
responded to the growing economic challenge they faced from Japan and Europe with
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a new strategy. The new strategy focused on the establishment of production and sales
bases in foreign countries. European and Japanese companies subsequently
implemented this strategy too, which manifests a visible feature of the process of
globalization
Nature of TNCs
Many of the MNCs have transformed themselves to TNCs. According to John
H. Dunning, "from behaving largely as a confederation of loosely knit foreign
affiliates designed primarily to serve the parent company with natural resources or
local markets with manufactured products and services, to its maturation over the .....
years as a controller of a group of integrated value adding activities in several
countries, the MNC (TNC) is now increasingly assuming the role of an orchestrator of
production and transactions within a cluster, or network, of cross border internal
external relationships, which may or may not involve equity investment, but which
are intended to serve its global interest."
Dunning further states:
"From being mainly provider of capital, management and technology to
its outlying affiliates, each operating more or less independently of each other, and
then a coordinator of the way in which resources are used within a closely knit family
of affiliates the decision-taking nexus of the MNC (TNC) in the late 1980s has come
to resemble the central nervous system of a much larger group of independent but
less formally governed activities, whose function is primarily to advance the global
competitive strategy and position of the core organisation. This it does, not only by, or
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even mainly by, organising internal production and transactions in the most efficient
way; or by, its technology, product and marketing strategies, but by the nature and
form of alliances it concludes with other firms."
Dunning further explains that the TNCs "....stop thinking of themselves as
national markets who have ventured abroad and now think of themselves as global
marketers. The top management and staff are involved in the planning of world-wide
manufacturing facilities, marketing policies, financial flows and logistic systems. The
global operating units report directly to the chief executive or the executive
committee, not to the head of an international division. Executives are trained in
world-wide operations, not just domestic or international division. Executives are
trained in world-wide operations, not just domestic or international. Management is
recruited from many countries; components and supplies are purchased where they
can be obtained at the least cost; and investments are made where the anticipated
returns are the greatest."

The growth of Transnational Corporations

According to Peter Drucker, the period of most rapid growth of TNCs-the
fifties and sixties-was the period of most rapid growth of transnational trade. Indeed,
during this period the world trading economy grew faster at an annual rate of 15%, or
so, in most years-than even the fastest growing domestic economy, that of Japan.
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The number of transnational corporations in the world has jumped from 7,000
in 1970 to 40,000 in 1995. TNCs of all sizes have a total of 102, 537 foreign affiliates
at the beginning of the new millennium, while global in reach, these corporations'
home based are concentrated in the northern industrialised countries, where 90% of all
transnationals are based. More than half come from just five nations: France,
Germany, the Netherlands, Japan and the United States of America. But despite their
growing numbers, power is concentrated in the top, i.e., the 300 largest corporations
account for one quarter of the world's productive assets. The UN has justly described
these corporations as "the productive core of globalising world economy". Their
technological knowledge, international financial transactions, and ultimately the
power of control. They manufacture and sell most of the world's industrial capacity, of
control. They manufacture and sell most of the world's automobiles, airplanes,
communications, satellites, computers, home electronics, chemicals, medicines and
biotechnology. They harvest much of the word'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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Factors contributed for the growth of TNCs

i.

Financial superiority.- TNCs enjoy financial superiorities over national companies.

a.
b.
c.
d.

ii.

They are:
The TNCs have huge financial resources at their disposal.
The TNCs have easy access to external capital markets.
The TNCs can have the access to international banks and financial institutions.
The TNCs can use the funds more efficiently, economically and effectively.

Technological superiority.- The TNCs are rich in advanced technology. They

develop the technology through continuous research and development. The rich
financial and other resources of the TNCs enable them to invest on R & D and
develop the advanced technology.

iii.

Product innovation.- The TNCs, by virtue of their widespread operations in many

countries, collect information regarding customers, taste and preferences. Further, the
TNCs with their strong R & D departments, invent new products and develop the
existing products.

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iv.

Market superiority.- The TNCs have a number of market superiority over the

domestic companies. They are:

a. The TNCs enjoy quick transportation and warehousing facilities.
b. They adopt more effective advertising and sales promotion techniques.
c. Availability of more reliable and up to date information relating the market expansion
in different countries.

Advantages of Transnational Corporations

In the process of carrying out the business, TNCs directly and indirectly help
both the home country and the host country.
In host country
TNCs held the host countries in the following ways:
1) Level of industrial and economic development increases due to the growth in ancillary
and service industry of the host country.
2) TNCs help increase the investment level and thereby the income and employment in
the host country.
3) TNCs have become vehicles for the transfer of technology, especially in the
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developing countries.
4) The host countries business can also get latest sophisticated management techniques
from the managerial practices of TNCs.
5) Domestic industry can make use of the R & D outcomes of TNCs.
6) The TNCs enable the host countries to increase their exports and decrease their import
requirement.
7) Domestic supplies of various inputs and domestic market intermediaries of the host
country get the stimulation and increased business from the operations of the TNCs.
8) TNCs break protectionism, create competition among domestic companies and thus
enhance their competitiveness.
9) TNCs provide and efficient means of integrating national economics.
10)
TNCs work to equalise the cost of factors of production around the world.
11)The host country can take the advantage of the foreign culture brought by the TNCs.
In home country
TNCs home country can get the following advantages from the operations of
TNCs:
1) The industrial activity of the home country gets fully activated.
2) TNCs contribute for favourable balance of payments of the home country in the longrun.
3) TNCs create opportunities for marketing the products produced in the home country
throughout the world.
4) TNCs create employment opportunities to the home country people, both at home and
abroad.
5) TNCs make their home countries rich by increasing the GNP.

Disadvantages of TNCs
Despite many advantages, TNCs are often criticised by both the host country
and home country. As per the Preface to the ILO report on Multinational Enterprises
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and Social Policy, "For some, the multinational companies are an invaluable dynamic
force and instrument for wider distribution of capital, technology and employment:
for others, they are monsters which are present institutions, nations or international
cannot adequately control, a law to themselves with no reasonable concept, the public
interest or social policy can accept."
In host countries
1) TNCs are most atrocious "hydra-headed economic monitors that imperil the political
sovereignty of nations.
2) Through their power flexibility, TNCs can evade or undermine national economic
autonomy and control, and their activities may be inimical to the national interest of
particular countries.
3) TNCs may destroy competition and acquire monopoly power.
4) TNCs may adopt ethnocentric approach in staffing and thereby cause unemployment
in the host country.
5) TNCs may use the natural resources of the host country indiscriminately and cause
fast deletion of the resources.
6) A large sum of money flows to the foreign countries in terms of payments towards
profits, dividends and royalty.
7) TNCs invest in those sectors which earn high rate of profit, exploit the material, etc.
8) TNCs can have unfavourable effect on the balance of payments of a country by
investing less and transferring high returns.
9) The TNCs cause fast depletion of some of the non-renewable natural resources in the
host country.
10)
The 'transfer pricing' enables TNCs to avoid taxes by manipulating prices on
intra-company transactions.
11)The TNCs technology is designed for world-wide profit maximisation, not the
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development needs of poor countries. They do not engage in R & D activities relevant
to the developing countries.
In home country
1) TNCs may neglect the home country's industrial and economic development as it
invests in more profitable countries.
2) TNCs transfer the capital from the home country to various host countries causing
unfavourable balance of payments position.
3) TNCs may not create employment opportunities to the people of home country, if it
follows geocentric approach or polycentric approach.
4) TNCs may bring the culture from foreign countries which is detrimental to the interest
of the home country.

Role of Transnational Corporations in India

At the end of 1990 there were 469 foreign companies in India. In addition,
there are many Indian companies with foreign equity participation. Later with the
economic liberalisation the Government in 1991 encouraged the private sector and
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invited the foreign firms to India to invest. The number of top 500 MNCs operating in
India and their country of origin has been presented hereunder.
Large and dominant MNCs along with Indian companies are covered under
MRTP Act. TNCs are specifically covered under Foreign Exchange Management Act
(FEMA).
TNCs have profit maximisation as the most important objective. But, India
expects the TNCs to increase their exports and earn foreign exchange for India. The
Indian Government wants the TNCs to provide their technology to Indian companies.
The Government allowed the TNCs to invest in India through joint ventures or
technical collaboration with the Indian companies. It is widely criticised that TNCs in
India did not invest in environmental pollution controlling equipment as they are
normally do in their home country.

Bibliography:

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