Introduction
A transnational corporation is any corporation that is registered and operates in more than one country at a time. They are also called multinational corporations. These corporations have their headquarters in one country while operating wholly or partially owned subsidiaries in at least one other country (Schularick & Solomou pp. 33 – 70). These subsidiaries report to the corporation’s central headquarter, where all its operations are organized. Since the 1950s, these transnational corporations have largely grown in number, which has brought about controversy because of their political and economic power and the complexity of their operations. This has cropped due to the argument of some critics who maintain that these corporations do not exhibit loyalty to the hosting countries, but act solely in their interests.
In this paper, I have discussed much about the transnational corporations in the light of understanding the history of international trade, it development and the role of trading blocks, and international institutions. Additionally, I have discussed the marketing environment of the transnational corporations in both the home and hosting countries. In this regard, I have discussed the advantages of foreign direct investment over other measures such as exporting and licensing.
History of International Trade
In the 16th and 17th centuries, older systems of trade were replaced by Mercantilism. Later in the 18th century, people shifted to liberalism. In 1776, Adam Smith wrote his boo ‘the Wealth of Nations’, in which he explained the importance of specialization and in production, and the scope of international trade. In the 19th century, countries adopted professionalism, which faded away towards the end of that century (Lehmann & O'Rourke pp. 606-616). Around early 1900s, western countries adopted systems of economic liberty, where quantitative restrictions were reduced or even eliminated. In this move, these countries reduced custom duties among their trading partners. All the currencies were freely and easily convertible to gold. Additionally, entrepreneurs also established businesses easily in any country and finding employment was also easier (Nenci pp. 1809-1835).
However, during the First World War, countries imposed protectionist policies that built walls of control at wartime. Despite trying to bring back the trade relationships in the post war period, the economic recession of 1920 changed the balance of trade, which brought about change of fortune due to fluctuation of currencies. Later in May 1927, the League of Nations organized the World Economic Forum, which led to the drawing up of Multilateral Trade Agreement. The General Agreement of Tariffs and Trade followed in 1947 (Kerr pp 19 – 30).
Despite these successes, depression struck again in 1930. During this period, many countries raised import duties; others imposed import quotas and other restrictions such as import prohibition and licensing in a move to create a healthy balance of payment. Later, countries gradually began negotiations of continuous review of their international trade policies, which led to several countries agreeing to the guidance of the international organizations and trade agreements in terms of international trade (Chaudhary 2008).
Currently, countries have better understanding of international trade and factors that influence global trade. Countries have entered into pacts that support free trade in which they have abolished or reduced tariffs such as import duties and allowed free trade of goods and services. These countries have adopted policies that encourage investment, which has improved the existence of transnational corporations.
Discussion
In the United States, there are various motives for establishing the presence of corporations in foreign countries. The major motive in several industries is the desire for growth (Maneschi 1998). Some corporations might have met the domestic demand, but still anticipate additional growth. These corporations might possess the required resources to adventure into foreign markets since they view these foreign markets as avenues for growth (Pei pp. 78-85).
Another motive that makes a corporation to opt for establishing branches in foreign countries could be the desire to escape the protectionist policies imposed by the importing countries. The other motives could include preventing competition from foreign businesses through acquisition or partnership. Alternatively, it could be aimed at reducing the cost of labor through using the cheap labor in developing countries, for example China. These transnational corporations could also be seeking to take the advantages of specific location of natural resources. Some natural resources are expensive or bulky to transport, therefore, their exploitation would require the transnational corporations to establish subsidiaries in the economies where these resources are located.
Advantages of FDI over exporting and licensing
Transnational corporations have played an important role in the world economy through both international trade and foreign direct investment. These corporations have advantages associated with the foreign direct investment both to the hosting and home economies. For these reasons, developing economies have liberalized their economies to attract foreign direct investment. Additionally, several corporations have developed interest in engaging in FDI.
Second are the employment effects. Most of the developing economies struggle with the problem of unemployment. When new corporations enter into their economies, there would be more employment opportunities than a case where these corporations could produce their produce locally and export them or if they licensed the products. In this case, many people would be employed in various departments, thereby reducing the unemployment rates Ndambendia & Njoupouognigni pp. 39-45).
Another advantage is the effect on competition and economic growth. Competition helps in ensuring firms produce standard products and steering economic growth. Foreign firms bring in new strategies in production; hence, local firms strive to keep up with competition by adjusting to the standards of these foreign corporations and stimulating economic growth (Claudia & Mihaela pp. 82-93).
Foreign direct investment has an effect on the balance of payment of the hosting economies through the initial capital inflows, import substitution, and export of goods and services to other countries. Imports and exports are the major causes of the payment imbalances of economies. If these goods were produced and exported in the home countries of these transnational corporations, there would be a trading imbalance. However, if these corporations engage on foreign direct investment, the hosting economies would cut costs on exports and increase the revenue from exports (Apergis 2008).
Benefits to home country and the TNC
The home country from which they corporations operate and have their headquarters have advantages related to foreign direct investment of their corporations in foreign economies. Additionally, the corporations also have benefits associated to their foreign direct investment that would make them forgo licensing or exporting.
The first advantage to the home economy is the positive effect on balance of payment due to inward flow of foreign earnings. These corporations remit their foreign earning to their home countries, which gain from these foreign earnings. Additionally, increased demand for exports of capital-equipment from the home countries is an added advantage. This also increases the employment opportunities for the locals (Gazioglou & McCausland pp. 505-510).
Secondly, these transnational corporations engage in the markets of the countries where they learn valuable skills on handling these countries especially in business negotiations. These skills can be transferred back to the home country.
For the TNC, there are several advantages such as escaping the protectionist policies of importing countries. Some countries have put in place protectionist policies that bar exporters from inflating their markets with foreign goods. They also discourage their local business from importing in order to encourage local production. Foreign direct investment could help the TNC to escape these police and produce in these foreign countries instead of exporting to them (Cuervo & Low Sui pp 81 – 93).
Secondly, the most certain method to prevent competition from foreign business it through acquisition or partnership. Therefore, transnational corporations prefer foreign direct investment in beating competing firms by either acquiring them or establishing partnership subsidiaries.
The other advantage of foreign direct involvement is the advantages associated with reducing costs, especially those related to labor. Most of the developing countries have cheaper labor compared to the developed world. By establishing subsidiaries in these developing countries, the transnational corporations hold down the costs of production.
Ideologies and Foreign Direct Investment
There are three political ideologies about the foreign direct investment of transnational corporations. These include the radical view, the free market view and the pragmatic nationalism. According to the radical view, which is also called the Marxist view, the transnational corporations exploit the developing countries by extracting profits for the home economies while giving nothing of value in exchange. According to Karl Marx, these corporations are instruments of domination by the developed nations over the developing world and not development partners (Pinto & Pinto pp. 216-254). Additionally, he asserts that these corporations keep the developing nations dependent on capitalist nations for jobs, investment and technology. However, the collapse of communism, coupled with poor economic performance of nations that upheld this view against the good economic performance of the nations that embraced capitalism led to the retreat from the radical view towards the end 1980s.
Adam Smith and Ricardo also came up with theories to support the free market view. In their theories, they encouraged that international production should be categorized according to national comparative advantage where countries specialize in the products that they are capable of producing more efficiently (Tomasi pp. 9 – 19). In their opinion, the transfer of resources among nations benefits and strengthens the hosting economies. However, they maintained that the strength of free market view is evidenced by the pro-investment changes in law and growth of bilateral agreements. Nevertheless, they maintain that all nations should impose restrictions on foreign direct investment.
The pragmatic nationalism acknowledges that foreign direct investment has its benefits and costs associated with it. Therefore, hosting nations should consider the costs and benefits before allowing a transnational corporation to engage in foreign direct investment in their economies (Fayerweather pp. 163 – 200). They should disallow the corporations that seek to harm the indigenous industries and encourage those that operate with national interest. However, this view recognizes the difficulty of predicting the interests of these transnational corporations until they enter into the economy. Most of the successful developing economies such as Japan, China and south Korea followed the pragmatic nationalism view.
Disadvantages of transnational corporations
Despite the advantage related to the foreign direct investment of the transnational corporations, there are disadvantages they pose, both to the home and to hosting countries. In the hosting countries, these corporations bring about competition; however, adverse effects of competition could be disadvantageous to the hosting economies (Eidenmüüller pp. 707-749). Additionally, there could be adverse effects on the balance of payment; this could occur due to the outflow of earnings from a foreign subsidiary to its home country. It could also occur if the transnational corporation’s subsidiary imports the raw materials used for its production, which result into adverse effects on the current account. Finally, there could be adverse effects on the hosting country’s autonomy and sovereignty (Maheshwari pp. 246 – 272).
Conclusion
Most transnational corporations have used foreign subsidiaries in order to minimize escape the protectionist policies imposed by most developing countries such as taxation on imports. They have also used foreign direct investment in these developing economies to take advantage of the cheap foreign labor in these developing countries as well as putting up with the competition from businesses in the developing hosting economies through acquisition and partnerships.
However, the various political views on foreign direct investment encourage the protection of the hosting economies. Karl Marx for instance opposes the idea by asserting that foreign direct investment is an exploitation of the less developed nation by the developed economies, which take away huge profits in exchange of no valuable benefit. The pragmatic nationalism and the free market view associate foreign direct investment with several benefits while insisting on imposition or regulations to protect the developing nations from overexploitation.
Finally, while there are disadvantages and costs of foreign direct investment by the transnational corporations, the benefits far outweigh them hence deeming these corporations advantageous, both to the home and to hosting economies. The hosting economy has advantages of proper balance of payment, employment creation, transfer of resources such as capital, management and technology, and favorable effects on competition and economic growth. The home economy also gains from the positive effects of the balance of payment, effects on employment and the skills learnt in the foreign markets.
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