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CHAPTER 17
TRANSNATIONAL CORPORATIONS: THE GOVERNANCE OF FOREIGN INVESTMENTS
Overview:
Transnational corporations (TNCs) are important actors in IPE today. They compete in regional and
global markets and provide foreign direct investment (FDI) that is much sought after by national governments keen
to create jobs, gain access to technology, and grow their economies. TNCs have always been controversial because
of the power they seem to possess and because their “global reach” makes them difficult for nation-states to
regulate or control.
This chapter looks at the contemporary pattern of TNC investment and answers a number of important
questions, such as “What are TNCs?” “Where do they operate and why?” and “How much power do they have?”
Perceptions of TNCs have evolved as IPE has changed over the past half century. Some perceive TNCs as agents
of capitalist imperialism, tools of U.S. hegemony, and state-level actors engaged in “triangular diplomacy.”
Many scholars have called for a formal international regime to govern state-TNC interactions, much as the
World Trade Organization (WTO) provides a system of governance for international trade. But recent attempts to
negotiate such a regime have been unable to overcome the self-interest and fears of TNCs and states. TNC
investment flows have begun to shift more towards emerging markets, but the bulk of FDI inflows still go to
developed countries. Competition for transnational markets and investment has intensified, putting more pressure on
states and TNCs. While the importance of TNCs to IPE analysis remains clear, their future is still uncertain.
Learning Objectives:
• To define the significance of transnational corporations (TNCs).
• To explain the geographical patterns of foreign direct investment, and what factors account for these patterns.
• To explain some of the primary factors that influence TNC FDI flows.
• To discuss the product cycle theory and appropriability theory, and show how they apply to TNCs.
• To explain some structuralists’ views on TNCs and FDI.
• To explain and discuss the impact of size and other factors on the power of TNCs.
• To understand perspectives on the supposed relationship between U.S. hegemony and TNCs.
• To assess the factors that influence bargaining between TNCs and governments.
• To discuss developments associated with the Multilateral Agreement on Investment (MAI) and efforts to
generate an international investment regime.
• To explain some of the many issues associated with holding TNCs accountable to different entities, including
state, NGOs, sovereign wealth funds.
Chapter Outline:
INTRODUCTION
a) TNCs are an integral important actors in the international political economy that operate in markets that
span national borders and often transfer badly needed resources and know-how to developing countries.
b) TNCs engage in foreign direct investment (FDI) for a variety of reasons: to exploit a competitive
advantage they have; to gain access to cheaper labor and natural resources; to circumvent trade barriers and
mitigate the effects of currency instability; to be close to their customers; and to respond to the strategic
moves of other TNCs.
c) FDI has grown dramatically over the last sixty years, fueled by technological changes facilitating
international transportation and communication and the spread of economic liberalism across the globe.
d) For much of the post–World War II period, the bulk of FDI flowed from rich, northern countries to other
rich, northern countries.
WHAT ARE TNCS?
a) For many years, the term multinational corporations (MNCs) was applied to firms that operated in
several different national markets. As global markets and production structures have emerged, the accepted
term has become transnational corporations (TNCs).
b) TNCs account for a significant portion of the world GDP.
TNCs IN PERSPECTIVE
a) TNCs have been around since the 1600s.
b) Because TNCs operate in markets that span national borders, they necessarily invest in production,
research, distribution, and marketing facilities abroad, often transferring technology in the process.
c) There are many exaggerated statements made about TNCs.
How Large are TNCs?
a) TNCs come in all sizes, usually measured by the value of their foreign assets.
b) “Giant” TNCs are the largest 200 firms.
c) Table 17-2 lists the largest global companies by market value in 2012.
d) We can measure the relative size of TNCs on the basis of their foreign assets, market capitalization, and
number of total employees.
e) Many large TNCs are in the sectors of banking, energy, and electronic/communications.
The Recent Rise of TNCs
a) The total amount of inward FDI flows increased dramatically from the 1990s to 2007. After a dip during
the financial crisis, FDI inflows reached $1.5 trillion in 2011
b) Economic liberalization policies have helped countries attract FDI and advance their economic agendas.
c) Technology has reduced the transportation and communication costs, encouraging FDI.
d) Liberalization and technology combined have accelerated competition and thus FDI.
The Pattern of TNC Operations
a. Despite appearances, most TNC investment is North-North based rather than North-South. Recently, firms
from developing countries have entered global markets and acquired foreign business assets. Five TNCs on
UNCTAD’s top 100 list are headquartered in newly industrialized countries.
b) Inflows of FDI to developed countries dropped from 83 percent in 1990 to only 47 percent of overall
inflows in 2011. Emerging economies in Asia, Latin America, and the Caribbean have become attractive
locations for TNC operations.
c) Despite recent changes, a great deal of FDI is still regionally based, flowing out of countries in the EU into
other EU countries and out of countries in NAFTA and into other NAFTA countries.
d) A 2011 survey of 3,000 TNCs found that China, the United States, India, Indonesia, Brazil, and Australia—
in that order—were seen as the most attractive locations for future FDI.
What Determines Where TNCs Invest?
a) The theory that TNC invest where wages are cheap is incomplete. Some of the explanations for why
different TNCs invest in different parts of the world are discussed below.
Product Cycle Theory
a) TNCs may invest in one country if they have some particular knowledge or advantage that compensates for
other disadvantages.
b) In the first stage of the product cycle theory, the firm identifies a need that can be met by producing a
product locally. In phase two the product is exported to other countries with similar incomes and living
standards. In the third phase the product is produced more efficiently in a newly industrialized nation and
exported back to the country in which it was originally produced.
Appropriability Theory
a) This theory helps explain why some firms invest abroad rather than licensing production to a local firm or
taking on a local partner.
b) Some TNCs have too much to lose if they enter into partnerships with foreign firms, especially when they
have an “intangible asset” such as a trademark or copyright. FDI then becomes a measure to defend the
TNC from foreign competition or those who would steal or otherwise acquire the advantage.
TNCs AND UNDERDEVELOPMENT
a) Stephen Hymer, a structuralist IPE theorist, argued that TNCs sometimes exploit unique advantages in
developing nations that actually hurt the development chances of these nations.
b) Technology transferred to developing nations is often inferior to the technology in the home nation of the
TNC.
Politics and Protectionist Barriers
a) Lower trade barriers within regional blocs often encourage TNCs to invest overseas. However, sometimes
TNCs will invest within a nation to get around or go under trade barriers that protect a bloc of states. An
example is Japan’s FDI in the United States that helped it penetrate the U.S. market without paying import
duties.
b) The Boeing company rewards other countries who purchase its planes with “offsets” that allow for
production of certain plane parts in those countries.
Currency Instability
a) Some FDI is often an attempt to counter unstable foreign exchange rates that can raise production costs and
reduce corporate profits.
b) Many TNCs adjust local production to fit local markets and thus minimize the impact of trade barriers and
currency problems on international business.
Location-Specific Advantages
a) Location-specific advantages include access to natural resources, economies of scale, skilled workers, and
closeness to key markets.
Competition
a) Some firms are driven to invest abroad because of simple competitive pressures—in an attempt to beat out
other firms.
b) TNCs invest abroad to protect a competitive advantage, to exploit a monopoly position, to get around trade
barriers, to avoid currency problems, to take advantage of special production environments—and because
they are driven to do so by their competition with other TNCs.
HOW POWERFUL ARE TNCs?
a) It is commonly assumed that TNCs are quite powerful—almost as powerful as some states. The high
revenues of many TNCs, many of which exceed the GDPs of sovereign nations, are the basis for this
assumption.
b) However, statistics used to compare TNCs with states assume that utility of wealth for one is equivalent to
that of the other and ignore other factors such as sovereignty, citizens, and military power. Both states and
TNCs have power, and so sometimes they must negotiate and engage in diplomacy, but their powers differ
and so their relationship is complex and evolving.
CHANGING REACTIONS TO TNCs
a) There are different viewpoints about the significance of TNCs and their impact on the international political
economy.
TNCs and Capitalist Imperialism
a) One popular theory is that TNCs and FDI were elements of the first modern era of globalization at the turn
of the last century until WWI.
b) Lenin argued that economic imperialism replaced colonial imperialism. TNCs replace foreign armies in
exploitative situations.
c) Stephen Hymer makes a similar argument today that TNCs wish to exploit a monopoly position while
protecting a key asset.
TNCs as Tools of U.S. Hegemony
a) The view that TNCs served as tools of U.S. hegemony became popular during the Cold War era.
b) An example of this argument today would be the role the Boeing company played in U.S. relations with
China for the past 40 years, symbolic of China’s commitment to modernization and the US commitment to
improved diplomatic relations.
c) Robert Gilpin argues that by the mid-1970s U.S. hegemony was in declined due the growth of European
and Japanese industries. Thus, the perception was that the U.S. was in decline relative to the other two.
d) To the extent that these TNCs present world events and ideas in ways that cast a favorable light on U.S.
policies and U.S. values and interests, they are a source of what Joseph Nye calls “soft power.” Some have
argued that this soft power advantage is even more important to U.S. foreign policy in the long run than is
U.S. military dominance.
TNCs as State-Level Actors
a) There has been a significant increase in the number of Japanese and European TNCs.
b) There has also been an increase in the number of host countries, especially since the fall of the Soviet
Union.
c) More recently the largest TNCs are bargaining (carrying on “diplomacy”) with states and other TNCs,
often forming alliances to help develop technologies and spread the risk of investments.
d) Competition between states for FDI may force them to grant many concessions to attract TNC investment,
increasing the bargaining power of many TNCs. TNCs typically seek favorable tax treatment, state-funded
infrastructure, and perhaps even weakened enforcement of some government regulations.
e) The story of Mercedes-Benz investments in Alabama highlights the bargaining power TNCs often have in
negotiations with states. Alabama gave Mercedes tax abatements on machinery and equipment, improved
highways and other infrastructure the company needed, and spent money on education and training that
would benefit the company.
f) TNCs are “footloose” and have many possible investment options, whereas states are rooted, like trees, in
the territory they control. When a TNC has unique resources to offer while the state has few and faces stiff
competition from other states, the TNC has a tremendous advantage and the diplomacy can be very one-
sided. However, this need not always be the case; if states make their own investments in education,
resources, infrastructure, and so forth, then they can have the upper hand.
A GLOBAL FDI REGIME?
a) The Organization for Economic Cooperation and Developments sponsored talks on a Multilateral
Agreement on Investment (MAI).
b) TNCs sought equal treatment of their subsidiaries with local firms.
c) The U.S. and Europe have different norms and rules when it comes to business mergers. The case of EU
approval of the Boeing–McDonnell Douglas merger is discussed.
d) A new investment agreement could help states prevent TNCs using transfer price manipulations to avoid
taxation in different locales.
e) The attempt to bring about an MAI failed in 1998 as states were leery to give up the right to discriminate in
favor of domestic firms.
f) Many LDCs also opposed the new rules out of fear that they would encourage FDI-based imperialism.
g) Instead of one global agreement on FDI, UNCTAD reports that as of 2011 there were over 6,000 separate
International Investment Agreements (IIAs) between TNCs and nation-states, creating a complex
hodgepodge of rules and standards.
Box: TNCs, Global Commodity Chains, and Accountability
a) Most TNCs have attempted to either vertically integrate corporate functions related to the same product
such as processing and marketing that product, while others have attempted to horizontally integrate by
buying up other firms with the same product or “localizing” its commodity to fit the local market.
b) A global commodity chain exists when a firm like Nike outsources production and owns very little of the
production facilities. It also links with other TNCs that perform many of the functions such as distribution
it would normally try to control.
c) This type of chain makes it difficult to pinpoint blame on TNCs and make them accountable.
d) In the case of sweatshop labor, a number of NGOs have made efforts to press some TNCs to be
accountable for local working conditions.
e) Some 250 U.S. companies have also created codes of conduct for their subcontractors.
f) Corporate Social Responsibility has emerged as a controversial issue. Some see it as window dressing to
help corporate images.
CONCLUSION
TNCs Today
a) Dramatic growth in places like China and India has resulted in an increase in FDI coming from large
emerging economies.
b) Home-country operations of many TNCs have lost their preferential treatment in favor of more profitable
subsidiaries in this tough economic climate.
c) We may finally be seeing the emergence of the truly global corporation, what the CEO of IBM calls
globally integrated enterprises that are adept at linking together multiple partners and suppliers from
around the world to collaborate and share in the finance, design, and production of new products. This
development raises crucial political, economic, and social questions for students of IPE.
d) The rapid growth of sovereign wealth funds (SWFs) (from $500 million in assets in 1990 to almost $5.1
trillion in 2012) and state-owned TNCs worries many commentators. Often lacking accountability to
shareholders, regulators, or voters, their secrecy and potential investment in strategically important
industries poses risks.
e) The emergence of BRIC countries and SWFs has the potential to change the role of TNCs in the global
economy.
Box: Outsourcing and the Globally Integrated Enterprise: Boeing’s 787 Airplane
a) Some aspects of Boeing’s airplanes, which once gave it a competitive advantage, such as the design and
manufacturing of wings, are now entirely outsourced to other companies. Such outsourcing serves to
improve sales, enable access to skilled workers, and spread financial risk.
b) Many American employees at Boeing are concerned for their job security, damage to Boeing’s long-term
viability, and the shrinking of the middle class.
Key Terms:
• Foreign direct investment (FDI)
• Multinational corporation (MNC)
• Transnational corporation (TNC)
• Product cycle theory
• Appropriability theory
• Branch factory syndrome
• Transfer pricing
• Global commodity chain
• Corporate social responsibility
• Globally integrated enterprise
• Sovereign wealth fund
Teaching Tips:
• The first part of the chapter defines TNCs and discusses some of the major issues associated with them such as
their size, why they have become so important, the pattern of their operations, and why and where they invest.
Spend some time going over these basic characteristics of TNCs along with some of the controversial issues
surrounding their role in the global economy. This could be a good place to discuss the issue of counting the
number of TNCs and their market value and drawing conclusions based on objective criteria.
• Consider going over appropriability theory, product cycle theory, and other theories (if you are familiar with
them) in some detail. Some aspects of appropriability theory are discussed later in the chapter in terms of global
commodity chains and corporate social responsibility.
• Much of the rest of the chapter looks at the connection between TNCs and development, protectionism,
currency instability, and locational advantages. These subtopics will be more interesting to some students than
others.
• An interesting topic for many students is the connection between TNCs and political power. This might be a
good time to use a film in the class, especially one that deals specifically with this sort of issue. It is also a
strategic point in the class to connect TNCs to many other issues such as energy, economic development, and
hunger.
• Spend some time with students explaining the issue of governing TNCs, or what some would call maintaining a
TNC regime. This connects TNCs to other actors such as international organizations and nongovernmental
organizations.
• Finally, go over the issue of how much and why TNCs are going through a transformation these days. The
globally integrated enterprise is such an example and the box on Boeing outsourcing production of its new
airliners offers a good example of some of the forces pushing TNCs in this direction.
Sample Essay-Discussion Questions:
1. Why do TNCs engage in foreign direct investment (FDI) when there are good reasons why they might be less
efficient in producing things than foreign firms? Assess several factors that contribute to the decision by TNCs
to establish operations abroad.
2. Explain what is right and what is wrong with the following statement: “Most TNCs invest in less developed
countries because of the low wages that they can pay there.”
3. How would an international agreement on governance of foreign direct investment benefit TNCs? How would
such an agreement benefit states? What prevents such an agreement from being realized?
4. Ask students to explain the different perspectives of liberals, mercantilists and structuralists on TNCs.
5. Have students discuss the issue of accountability. Do they think that TNCs are held accountable enough for
their misdeeds, or should they be held more accountable? If so, through what political, economic, or social
institutions or mechanisms? Why might voluntary corporate social responsibility codes be insufficient
instruments to attain important social goals?
6. The first part of the chapter seems to suggest that TNCs are not as powerful as some of the popular literature
would have us believe. After reading the chapter how powerful do you think MNCs are? And why does it
matter, or does it?
Sample Examination Questions:
1. Which of the following is most accurate?
a) TNCs are not subject to nation-state regulation.
2. Which of the following is NOT one of the twenty largest nonfinancial TNCs (based on foreign assets owned)?
a) General Electric
3. Which of the following statements is incorrect?
4. Which of the following is the LEAST likely explanation for the pattern of most foreign direct investment?
5. Which of the following is NOT a significant reason for large TNCs to invest abroad?
6. Which of the following is NOT an element of the product cycle theory?
7. Which of the following best characterizes appropriability theory?
8. Which of the following best characterizes the “branch factory syndrome”?
a) investment abroad to protect an intangible asset like a brand name
9. Given the expanding importance of TNCs in the increasingly globalized markets of the world, the role of the
d) have stayed the same; the state’s role has always been to encourage its businesses.
10. Which of the following is a potentially significant problem with a globally integrated enterprise such as Boeing?
11. Robert Gilpin argues which of the following?
12. The reason that best accounts for the failure of the OECD-backed MAI is:
a) competitive antitrust legislation in different countries or regions.
13. The growing importance of BRIC economies may include all of the following EXCEPT:
d) externalization of human capital intensive steps such as product design.
14. Sovereign Wealth Funds are of great concern to some politicians because:
d) they are mostly controlled by enemies of the United States.
15. Outsourcing and offsets by TNCs can result in:
a) increased employee insecurity among workers in the home countries of the TNCs.
