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Transnational corporations
A transnational corporation is an enterprise that manages production or delivers services in more than one country. A TNC is a corporation that has its headquarters in one country, known as the home country, and operates in several other countries, known as host countries.
MNCs: Royal Dutch Shell Group (Netherlands/United Kingdom) DaimlerChrysler AG (Germany/USA) Unilever (Netherlands/United Kingdom) Rio Tinto Plc (Australia/United Kingdom)
After two years of slump, profits of TNCs picked up significantly in 2010, and have continued to rise in2011
3.
4. 5.
Vale
RioTintoGroup Intel
222,8
194,0 162,4
Company/Country
Wal-Mart Stores Norway Austria Royal Dutch Shell Argentina Exxon Mobil Denmark British Petroleum United Arab Emirates
Sinopec Group
273
Company/Country
Hong Kong Toyota Volkswagen Algeria General Electric Ukraine General Motors Samsung Electronics Vietnam
Siemens
103
3 3 4 4 10 12 12 14 18
20
Norway, Sweden, Italy 2 Luxembourg, Hong Kong, Mexico, Finland, Australia, Ireland, China, Canada, Malaysia - 1
Industry
1 2 3
General Electric Vodafone Group Royal Dutch/Shell Group British Petroleum Company Exxon Mobil
USA UK
187544
228238
USA
Petroleum expl./ref./dist.
161245
228052
Industry
1 2
Netherlands Petroleum expl./ref./distr. /United Kingdom France United States Petroleum expl./ref./distr. Petroleum expl./ref./distr.
261 393
458 361
4 5
Industry
Retail
648 905
2 3 4 5
Retail Electrical & electronic equipment Transport and storage Electrical & electronic equipment
Company/Country
Latvia Wal-Mart Stores
Slovenia
Malta Siemens McDonalds
2 052 821
412 961 402 700 400 000
Gazprom
Hewlett-Packard Iceland Pepsi Co Nestle Barbados
393 000
324 600 317 398 294 000 281 000 273 331
Transnationality index
TNI is calculated as the average of the following three ratios: - foreign assets to total assets - foreign sales to total sales - foreign employment to total employment
Corporation
Home economy
Industry
TNI
1 2 3 4 5
Mining Metals and metal products Business Services Chemicals Food, beverages, tobaco
GSI, the Geographical Spread Index, is calculated as the square root of the Internationalization Index multiplied by the number of host countries
II, theInternationalization Index, is calculated as the number of foreign affiliates divided by the number of all affiliates
At Royal Dutch Shell, for instance most financial officers around the world are Dutch nationals. Reasons given for ethnocentric staffing policies include: - lack of qualified host country senior management talent - a desire to maintain a unified corporate culture - unwillingness to transfer the parent firms core competencies (for instance, a specialized manufacturing skill) to a foreign subsidiary.
It has been estimated that an expatriate executive can cost a firm up to three times as much as a domestic executive because of relocation expenses and other expenses such as schooling for children annual home leave and the need to pay income taxes in two countries.
Strategic Predispositions
Philosophies of Management
Ethnocentric predisposition Polycentric predisposition
Polycentric predisposition
Strategic Predispositions
Philosophies of Management
Ethnocentric predisposition Polycentric predisposition
Regiocentric predisposition
Regiocentric predisposition
Strategic Predispositions
Philosophies of Management
Ethnocentric predisposition Polycentric predisposition
Geocentric predisposition
Regiocentric predisposition
Geocentric predisposition
Management holding a geocentric orientation believes that the entire world is a potential market and strives to develop strategies that will work in every market. Instead of stating that things are inherently different in each market and thus must be handled in a distinctive manner, a geocentrically oriented company will look for universal as well as local best practices to help a company thrive in all markets. In geocentrically oriented companies, authority is not simply placed with headquarters at home or with subsidiaries abroad, but rather a is dispersed more equally between the two so that a collaboration is formed. Also, a view of superiority is not based on nationality. Geocentrism involves a collaborative effort between subsidiaries and headquarters to establish universal standards and permissible local variations, to make key allocation decisions on new products, new plants, new laboratories (Wirlpool - regiocentric) (Microsoft, Coca Cola, most corporations)
Orientation of an MNC
Orientation of an MNC
TNC activity is sometimes beneficial for host country economic development, and at other times is detrimental to such development. One might suggest that natural resource investments are the least likely to offer substantial benefits to host countries, while efficiency oriented investments are the most likely to offer substantial benefits to host countries. Market oriented investments are likely to fall somewhere in between these two types, sometimes offering benefits, and at other times imposing costs. TNC activity has historically been subject to political considerations. As a consequence, the impact of any particular investment on any particular host country is shaped by the particular agreement between the firm and thehost country government. (bargaining power)
Benefits
1. TNCs can make a significant contribution to economic development. FDI is an important mechanism through which savings are transferred from the advanced industrialized world to the developing world. TNCs create fixed investments which dont generate boom and bust cycles. In addition, because TNCs invest by creating affiliates, FDI does not raise host countries external indebtedness. Of the many possible ways in which savings can be transferred to the developing world, therefore, FDI might be the most stable and least burdensome for the recipient countries.
Benefits
2. TNCs are important vehicles for the transfer of technology to host countries. Because TNCs control proprietary assets, which are often based on specialized knowledge, the investments they make in developing countries often lead to this knowledge being transferred to indigenous firms. In the absence of the technology transfer, the indigenous firm would not have been able to produce certain products. Technology transfer can in turn generate significant positive externalities with wider implications for development. Externalities arise when economic actors in the host country that are not directly involved in the TNC-local affiliate technology transfer also gain from this transaction.
Benefits
3. In addition to transferring technology TNCs transfer managerial expertise. Greater experience at managing large firms allows TNC personnel to organize production and coordinate the activities of multiple enterprises more efficiently than host country managers. This knowledge is applied to the host country affiliates, allowing them to operate more efficiently as well. Indigenous managers in these affiliates can then move to indigenous firms, spreading managerial expertise into the host country.
Benefits
4. TNCs enable developing country producers to gain access to marketing networks. When direct investments are made as part of a global production strategy, the local affiliates of the TNC and the domestic firms that supply the TNC affiliate become integrated into a global marketing chain. This opens up export opportunities that indigenous producers would not otherwise have.
Costs
1. Rather than transferring savings to developing countries, TNCs reduce domestic savings. Savings are reduced in two ways. First, it is argued that TNCs often borrow on the host country capital market rather than bring capital from their home country. TNC investment therefore crowds out rather than adding to domestic investment. Second, it is suggested that TNCs earn rents above normal profits on their products and repatriate most of these earnings. Host country consumers therefore pay too much for the goods they buy, with negative consequences on individual savings, while TNC profits, which could potentially be a source of savings and investment in the host country, are transferred back to the home country. The amount of domestic savings available to finance projects therefore falls.
Costs
2. TNCs exert tight control over technology and managerial positions, preventing the transfer of both. The logic here is simple. As we saw above, one of the principal reasons for TNC investment arises from the desire to maintain control over proprietary assets. Given this, it is indeed hard to understand why a TNC would make a large fixed investment in order to retain control over proprietary technology, and then once having done so begin to transfer this technology to host country firms. Managerial expertise is not readily transferred either, in large part because TNCs are reluctant to hire host-country residents into top-level managerial positions. Thus, the second purported benefit of TNC the transfer of technology and managerial expertise can be stymied by the very logic that causes TNCs to undertake FDI.
Costs
3. TNCs can drive domestic producers out of business. This can happen in one of two ways. On the one hand, domestic firms producing in the same sector will face increased competition once a TNC begins selling in the domestic market. Using best practices for management and state of the art technology, MNCs can often under-price local firms, thereby driving them out of business. Second, TNCs often desire to assemble their finished goods from imported components. As a result, domestic input producers in the same industry will find that as the domestic producers they supply are driven out of business, they have no one to sell their intermediate goods. Thus, local input suppliers can also be driven out of business by TNCs.
In the past, TNCs primarily built their international production networks through FDI (equity holdings), creating an internalized system of affiliates in host countries owned and managed by the parent firm.
Over time, TNCs have also externalized activities throughout their global value chains. They have built interdependent networks of operations involving both their affiliates and partner firms in home and host countries.
Depending on their overall objectives and strategy, the industry in which they operate, and the specific circumstances of individual markets, TNCs increasingly control and coordinate the operations of independent or, rather, loosely dependent partner firms, through various mechanisms.
These mechanisms or levers of control range from partial ownership or joint ventures, through various contractual forms, to control based on bargaining power arising from TNCs strategic assets such as technology, market access and standards. Such mechanisms are not mutually exclusive and they can be as much complements as substitutes to FDI.
TNCs, like all firms, can decide to conduct activities inhouse (internalization) or they can entrust them to other firms (externalization) a choice analogous to a make or buy decision. Internalization, where there is a cross-border dimension, results in FDI, whereby the international flows of goods, services, information and other assets are intra-firm and under the full control of the TNC. Externalization results either in trade, where the TNC exercises no control over other firms, or in non-equity inter-firm arrangements in which contractual agreements condition the operations and behaviour of host country partner firms.
Costs of internalization
Internalization of cross-border activities brings with it the costs of running complex, multi-plant, multicurrency operations, which tend to increase the greater the social, cultural and political differences between locations. It also implies internalizing the full extent of risk associated with the activity, including capital exposure and business uncertainty. Finally, it assumes that the technical capability, skills and know-how required to perform the activity are either present in the firm, or not prohibitively expensive or time-consuming to acquire.
Benefits of internalization
To start with, TNCs will want to maximize value capture externalization clearly implies giving up part of the profits generated along the chain. Secondly, internalization avoids the transaction costs associated with finding suitable third parties and then stipulating contractual arrangements that tend to become more complex the greater the perceived risks associated with loss of control over parts of the value chain and over assets and valuable intellectual property (IP). Finally, internalization also eliminates the costs of managing relationships with NEM partners on a continuous basis, including flows of knowledge, goods and services; communication and information flows; and monitoring and control of compliance with contractual obligations.
Advantages of externalization
Externalization has a number of intrinsic advantages. These include shifting of certain costs and risks to third parties, as well as gaining rapid access to the assets and resources third parties may bring to the partnership. These can be hard assets, such as plants and equipment, access to low-cost resources, technological capability and knowhow, or often equally important soft assets, such as networks and relationships in host countries. Externalization allows the TNC to establish a more effective internal division of labour, freeing scarce resources to be used in other segments of its value chain in other words, it allows a focus on core business.
Developing and transition economies tend to host greenfield investment rather than crossborder M&As.
More than two-thirds of the total value of greenfield investment is directed to these economies, while only 25 per cent of cross-border M&As are undertaken there.
At the same time, investors from these economies are becoming increasingly important players in crossborder M&A markets, which previously were dominated by developed country players.
Mega deals
In 2010 there were seven mega-deals (over $3 billion) involving developing and transition economies (or 12 per cent of the total), compared to only two (or 3 per cent of the total) in 2009.
Horizontal
In many cases, TNCs conduct horizontal FDI activities in order to expand their operations into another market. If a multinational corporation is structured horizontally, it manages production facilities in different countries that all produce the same product. Each facility performs the same operations, from beginning of production to completion of the finished product. For example, an American retailer that builds a store in China is trying to earn more money by exploring the Chinese market. (GAP, motor vehicle companies)
Vertical
Vertical FDI, on the other hand, occurs when a multinational decides to acquire or build an operation that either fulfills the role of a supplier (backward vertical FDI) or the role of a distributor (forward vertical FDI).
Vertically structured multinationals manage facilities in different countries that perform usually only one part of the production process. The facility produces a part or good that will be used in another facility to continue the manufacture of the product or receives a part or good from another facility that it will use to continue the manufacturing process.
Ex
The use of contract manufacturing varies considerably across industries.
For instance, the toys and sporting goods, electronics and automotive industry are major users of contract manufacturing, outsourcing more than 50 per cent of production by cost of goods sold.
Contract manufacturing, in industries such as pharmaceuticals, on the other hand, is relatively new and is still small measured as a percentage of cost of goods sold.
Ex
In some industries such as electronics, contract manufacturers are very large operators and TNCs in their own right. For example, Inventec (Taiwan Province of China) designs, builds and internationally distributes electronics products for lead TNCs such as Apple (United States), Fujitsu-Siemens (Japan), and Lenovo (China); and it does this from production affiliates in countries such as Malaysia, Czech Republic and Mexico
Route to market
NEMs are inextricably linked with international trade and FDI, shaping global patterns of trade in many sectors. In industry segments such as automotive components, consumer electronics, garments, hotels and IT and business process services, contract manufacturing and services outsourcing represent a very large share of total trade. NEMs are thus a major route-to-market for countries aiming at export-led growth, and a major point of access to TNC global value chains.
Contract farming
Contractual relationship between an international buyer and (associations of) hostcountry farmers (including through intermediaries), which establishes conditions for the farming and marketing of agricultural products.
Ex
In contract farming, the numbers of individual suppliers are so great that arrangements with TNCs are made by intermediaries. For example, in 2008 Olam (Singapore) sourced 17 agricultural commodities from approximately 200,000 suppliers in 60 countries (most of them developing countries). Similarly, in 2008 food manufacturer Nestle (Switzerland) had more than 600,000 contract farmers in over 80 developing and transition economies as direct suppliers of various agricultural commodities
Licensing
Contractual relationship in which an international firm (licensor) grants to a host country firm (licensee) the right to use an intellectual property (e.g. copyrights, trade marks, patents, industrial design rights, trade secrets) in exchange for payment (a royalty). Licensing can take various forms, including brand licensing, product licensing and process licensing. In-licensing refers to a company acquiring a licence from another firm; out-licensing entails sale of intellectual property to other firms.
Franchising
Contractual relationship in which an international firm (franchisor) permits a host country firm (franchisee) to run a business modelled on the system developed by the franchisor in exchange for a fee. Franchising includes international master franchising, with a single equity owner of all outlets in a market, and unit franchising, with individual entrepreneurs owning one or more outlets.
Management contracts
Contractual relationship under which operational control of an asset in a host country is vested to an international firm, the contractor, which manages the asset in return for a fee. Management contracts involve not just selling a method of doing things but involves actually doing them