International Corporations

International corporations and their types. Reasons for the existence of TNCs.

One of the remarkable phenomena of modern economic life is the wide spread of the so-called international corporations. The main distinguishing feature of an international corporation is the ownership, control or management of the means of production in various countries. A prerequisite for this is the implementation of foreign direct investment (FDI) from the home country of the corporation to the host countries. The home country is the country in which the head office of the international corporation is located. The host country is the country in which an international corporation places units of various kinds created as a result of direct investment.

It is customary to distinguish two main types of international corporations:

(a) Transnational corporations (TNCs) – corporations whose parent company is owned by the capital of one country, with its branches in many countries of the world;

b) multinational corporations (MNCs) – corporations whose parent company belongs to the capital of several countries with its branches in many countries.

According to the above criteria, most international corporations should be classified as TNCs. Therefore, in the future, they will be given the main attention. In addition, it should be noted that the differences between TNCs and MNCs are not significant: these differences do not have a serious impact on the nature of the activities of the corporations concerned. The main thing is the globality of their strategy, investment and profit.

The main features of TNCs include:

the international nature of production, its implementation in different countries under the control of a single center; the great importance of trade between the divisions of the corporation located in different countries; the relative independence of the units in decision-making on operational issues related to the activities of these units; inter-country mobility of personnel, primarily managers; development, transfer and use of advanced technology within the corporation. 

Currently, about 40% of world trade is accounted for by intra-corporate sales of intermediate products and equipment between divisions located in different countries.

A list of the largest TNCs is given in tables 4.1; 4.2; 4.3.

Table 4.1 Resource requirements by component

25 largest TNCs in the world, ranked by the size of foreign assets, 1999

1) ITN – an index of transnationality, calculated as the average value of three ratios: foreign assets to total assets; overseas sales to general sales; overseas employment to total employment.

Source: UNCTAD, World Investment Report 2001.

Table 4.2 Resource requirements by component

25 largest TNCs based in developing countries, ranked by size

foreign assets, 1999

1) ITN – an index of transnationality, calculated as the average value of three ratios: foreign assets to total assets; overseas sales to general sales; overseas employment to total employment.

Source: UNCTAD, World Investment Report 2001.

Looking at table 4.1, there is a clear predominance of TNCs over MNCs: of the 25 largest corporations, only two are home countries1. If we take the list of one hundred largest corporations, the list of MNCs will increase only to four.

US companies dominate the list of the largest TNCs: 6 American corporations are among the 25 largest, 26 – in 100. It is followed by Germany (5 and 12), Japan (3 and 18), France (3 and 13). It should be noted that among the hundred largest TNCs in the world, only 3 are developing countries (see the first 3 corporations in table 2). They ranked 48th, 84th and 100th in 1999. Moreover, in terms of total assets, the world’s largest TNC – General Electric – surpassed the largest TNC in developing countries – Hutchison Whampoa Ltd. – by 8.4 times ($ 405.2 billion against $ 48.5 billion). The total assets of the  Mexican Cemex SA, which closes the list of the hundred largest TNCs, amounted to 11.9 billion. 

As for TNCs from countries with transition economies (Table 4.3), Russia’s Lukoil is leading among them by a wide margin. The value of its total assets in 1999 was 8.4 billion, foreign – 3.2 billion It is likely that in the near future it will become one of the hundred largest TNCs in the world.

Table 4.3 Resource requirements by component

10 largest non-financial TNCs based in countries with economies in transition, ranked by size of foreign assets, 1999

1) ITN – an index of transnationality, calculated as the average value of three ratios: foreign assets to total assets; overseas sales to general sales; overseas employment to total employment.

Source: UNCTAD, World Investment Report 2001.

If we analyze the industry affiliation of TNCs, the world leaders in this regard are corporations representing oil production and refining, automotive and electronics. In general, a similar pattern is found in TNCs from developing countries. In transition economies, only transport services are represented more than once in the top ten largest TNCs – one Latvian and two Russian companies.

Table 4.4 provides a list of international corporations operating in our country.

Table 4.4 Resource requirements by component

List of the largest foreign investors of the Republic of Belarus

Source: Ministry of Foreign Affairs of the Republic of Belarus.

Two of the hundred largest TNCs in the world are represented in the Republic of Belarus: Coca-Cola (42nd place) and McDonalds (63rd). Unfortunately, the Ford Motor Company has ceased operations in our country. Unfortunately, because the largest TNCs implementing a global strategy are a kind of “scouts” of the investment climate in those countries whose opportunity to invest in the economy appeared relatively recently. The continuation or termination of their activities can serve as a signal for other companies potentially interested in investing in other countries.

The main reason for the existence of TNCs is the advantages provided by the global organization of production and marketing. Such advantages arise in vertical and horizontal integration with foreign branches.

Through vertical integration, most TNCs can ensure the supply of raw materials and intermediate goods on the most favourable terms from their respective foreign regions. In doing so, it is possible to avoid (using more efficient intra-firm trading) the frequent imperfections of foreign markets, which could be fully manifested if the necessary resources had to be acquired from independent local firms. TNCs can also provide a better distribution and service network. Vertically integrated TNCs, relying on their foreign affiliates, can better protect and use their dominant position in the market, adapt their products to local conditions and tastes, and guarantee the high quality of goods.

TNCs can effectively use economies of scale in the production, financing, organization and use of the results of research and development (R&D), market research. Large volumes of production allow TNCs to carry out a rational division of labor and specialization much better than smaller national firms.

TNCs can benefit from differences in input prices between the countries in which they are located. Intermediate products for which the use of unskilled labor is sufficient can be produced in countries with low wages and transported for subsequent assembly to other countries.

In addition, TNCs and their affiliates tend to have better access to  international capital markets than purely domestic firms. This makes it easier for them to fund large projects. TNCs are also in a position to concentrate R&D in developed countries, which are most suitable for this purpose because of the greater availability of technical personnel and equipment.

Further, the presence of foreign branches in many countries of the world allows the parent enterprise to receive and accumulate a huge amount of strategically important information about the state of the conjuncture in various regions of the world, track changes in prices, preferences and tastes of consumers, etc. Without the presence of branches, obtaining such information would be associated with much greater costs, and this information itself would be less reliable.

The motive for TNCs to invest abroad is the possibility of obtaining a higher return on additional investment there. Basically, any corporation could consider investing for higher returns in any other industry in its home country. However, as a rule, the corporation knows the situation in “its” industry better. Therefore, it is unlikely to analyze the possibility of investing in any other sector of the national economy before making a decision to invest abroad. Consequently, the criterion for making a decision on foreign investment will be a comparison of the potential rate of return on additional investment within the selected industry within the country and abroad. Of course, if the prospects of “their” industry both at home and abroad are not very attractive, the corporation will consider the possibility of diversifying its business.

TNCs, in comparison with national firms, are significantly better able to choose the operating environment. By definition, national firms operate in their own country when faced with specified operating conditions. In contrast, TNCs, when deciding on the location of a plant for the production of a particular type of product, can choose a suitable country, taking into account the level of wages, tax legislation, the possibility of obtaining subsidies, the foreign trade regime, etc. of the countries concerned.

As TNCs are comparable in scale to, and sometimes larger than, many of the countries in which their affiliates are located, they are able to influence local government policies more effectively than purely national firms. The financial power of TNCs allows them to buy up local firms if necessary in order to avoid competition from them and thus establish control over the market of the host country. Moreover, acquired local firms may even be simply closed.

Further, due to the large scale, TNCs are able to diversify their activities by operating simultaneously in markets for different products, thereby becoming less dependent on periods of difficulties in marketing the corporation’s main products. They are able to redistribute financial resources between different areas of their activities, concentrating each time on the most promising areas at the moment.

Finally, TNCs can use so-called transfer prices in intra-corporate trade. By artificially inflating them when supplying, for example, components to branches located in high-tax countries, TNCs can reduce their tax costs. This method could not be used when trading between independent firms.

The use of all or some of these advantages of TNCs over national firms explains the prevalence of TNCs and their high degree of influence in the global economy. As a result, TNCs have become by far the most powerful form of private economic organizations.