International Trade And Finance.docx

FACULTY OF LAW JAMIA MILLIA ISLAMIA International Trade and Finance

Transnational Corporations

Submitted By:ANILESH TEWARI B.A.LL.B(Hons) 3rd Year/5th Semester

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.

Anilesh Tewari

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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 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. 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 3|Page

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 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 4|Page

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 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 co-ordinate their operations in various ways-ownership may be private, State or mixed." 5|Page

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 key-indicators 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 affiliates are thereby two generally accepted proxy indicators of international production. TABLE 1.1

Year

1990

TNCs

35’000

Foreign

Total FDI Sales

Affiliates

outward

foreign

stocks

affiliates

150’000

US$ trillions

1995

40’000

270’000

US$ trillions

2001

65’000

850’000

US$ trillions

1.7 US$ trillions 2.7 US$ trillions 6.6 US$ trillions

of World

Employees

exports

4.4 US$

2.5 24 millions

trillions 7 US$

5.8 -

trillions 19 US$

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. 7|Page

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 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 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 world8|Page

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 sixtieswas 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. 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. They are: a.

The TNCs have huge financial resources at their disposal.

b.

The TNCs have easy access to external capital markets.

c.

The TNCs can have the access to international banks and financial institutions.

d.

The TNCs can use the funds more efficiently, economically and effectively.

ii.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.

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 10 | P a g e

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 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 11 | P a g e

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 long-run.

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 12 | P a g e

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 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 development

needs of poor countries. They do not engage in R & D activities relevant to the developing countries.

In home country 13 | P a g e

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 14 | P a g e

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 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.

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