Chapter 5 Transnational Corporations (TNC)

Chapter 5 Transnational Corporations (TNC)

1. International Business
Chapter 5
Transnational
Corporations (TNCs)

2. Concept of transnational corporation
Transnational corporation is defined as:
A system of production to provide goods or
services,
Composed of units located in different
countries,
Which meet centrally planned strategies
under a parent company,
Based on these concepts , Transnational
corporation combines two elements: the
group of companies and transnational
activity.

3. Causes of Evolution of Transnational
Corporations (TNCs)
The need for companies to increase their production
constantly, not only with the ultimate aim of increasing
profit, but also with aim of maximizing their market
value.
Following a major competitor,
Demographic reasons, as is the case in the U.S. company
which is forced to transnational corporations because
their domestic market is saturated and therefore tends
to decrease in proportion to demographic others.
(Marginal Utility)

4. Technological developments
Emergence and development of the so-called extractive
industries (oil industry, rubber industry, mining, etc.).
The cost differences, especially in countries where labor
is considerably cheaper. (Location Economy)
To avoid the trade barriers, and forming effective
regional groupings.
Advancement of transport, communications, and
processing of data (internet).
Causes of Evolution of Transnational
Corporations (TNCs)

5. Forms of TNCs
In the beginning, TNCs used three forms of
organization to structure the business
concentration:
The Trust form (Market Share)
Companies in the same sector
controlled by one (Monopoly) or two
(Duopoly) or a small number of big
companies (Oligopoly) which
monopolize the exploitation of a
product and be able to regulate its price.

6. The Cartel formcompanies not merged,
but banded together to reach common
agreements on supplies, processes and
prices, and to avoid competition
between them.
Forms of TNCs

7. The Holding form a holding company
that controls most of the actions of
several industrial and commercial
enterprises.
Forms of TNCs

8. Classifications of Transnational
Corporations (TNCs)
There are various classifications for these companies, however, the most
common are:
Activity of the company:
Extractive TNC:Those engaged in the extraction, processing and
marketing of raw materials located outside the territory of origin.
Manufacturing:Those who produce and industrialize in the host
country.
Service Producing:Those companies designed to offer services, for
example, Banks, companies transferring technology and companies
concerned with transportation and logistics.

9. Organizational Structure:
Organizational structure refers to:
The formal division of the organization into
subunits
The location of decision-making responsibilities
within that structure (centralized versus
decentralized)
The establishment of integrating mechanisms to
coordinate the activities of subunits including cross-
functional teams or pan-regional committees
Classifications of Transnational
Corporations (TNCs)

10. Characteristics of their owners or
components:
(In response to public and private nature of
the holders or constituents of the firm)
Global business: those that integrate the
interests of private entrepreneurs.
Public transnational corporation: those
formed solely by states, generally formed to
install and manage industrial and
administrative complex characters that are
of public services or financial services.
Classifications of Transnational
Corporations (TNCs)

11. Joint transnational corporation:
transnational corporation those in which
private interests and state coexist.
Classifications of Transnational
Corporations (TNCs)

12. The operation of Transnational
corporation:
Vertical integrationis the process in which
several steps in the production and/or
distribution of a product or service are
controlled by a single company or entity, in
order to increase the company’s or entity’s
power in the marketplace.
The company tries to get more things under
their reign to gain more control over the
profits the product / service delivers.
Classifications of Transnational
Corporations (TNCs)

13. Types of Vertical Integrations:
There are basically 3 classifications of Vertical
Integration namely:
Backward Integration–occurs when the
company tries to own an input product
company. Like a car company owning a
company which makes tires.
Forward Integration–When the business tries
to control the post production areas, namely
the distribution network. Like a mobile
company opening its own Mobile retail chain.
Balanced Integration–a mix of the above two.
A balanced strategy to take advantages of both
the worlds.
Classifications of Transnational
Corporations (TNCs)

14. Horizontal integration (also known as lateral
integration)
simply means a strategy to increase your market
share by taking over a similar company.
This take over / merger / buyout can be done in
the same geography or probably in other
countries to increase your reach.
Examples of Horizontal Integration are many and
available in plenty. Especially in case of the
technology industry, where mergers and
acquisitions happen in order to increase the reach
of an entity.
Classifications of Transnational
Corporations (TNCs)

15. Conglomerate integration: Diversification
Business combinations that are neither
vertical nor horizontal.
For instance, mergers between companies
that engage in different types of business
it is a process whereby a business acquires a
substantial number of other unrelated
business in order to form a large and highly
diversified corporation.
Classifications of Transnational
Corporations (TNCs)

16. Other Beneficial Roles
The TNCs also bring several other benefits to the
host country.
The domestic labor may benefit in the form of
higher real wages.
The consumers benefits by way of lower prices
and better quality products.
Investments by TNCs will also induce more
domestic investment. For example, ancillary
unitscan be set up to ‘feed’ the main
industries of the TNCs.
TNCs expenditures on research and
development (R&D), although limited is bound
to benefit the host country.

17. With or Against TNCs
Arguments for TNCs (The positive role):The TNCs play
an important role in the economic development of
underdeveloped countries.
1.Filling Savings Gap: The first important
contribution of TNCs is its role in filling the
resource gap between targeted or desired
investment and domestically mobilized savings.
2.Filling Trade Gap: The second contribution relates
to filling the foreign exchange or trade gap. An
inflow of foreign capital can reduce or even
remove the deficit in the balance of trade (BOT)if
the TNCs can generate a net positive flow of
export earnings.

18. •3. Filling Revenue Gap: The third important role of
TNCs is filling the gap between targeted
governmental tax revenues and locally raised taxes.
•4. Filling Management/Technological Gap:
transnational corporations (TNCs) not only
provide financial resources but they also supply a
“package” of needed resources including
management experience, entrepreneurial
abilities, and technological skills.
With or Against TNCs

19. Arguments Against TNCs(The negative role):
1.TNCs’ impact on development is very
uneven. In many situations TNCs’ activities
reinforce dualistic economic structures and
widens income inequalities.
2.Production is done with capital-intensive
technique which is not useful for labour
surplus economies. This would aggravate the
unemployment problem in the host country.
3.TNCs often use their economic power to
influence government policies in directions
unfavourable to development.
With or Against TNCs