TRANSNATIONAL CORPORATIONS

A transnational corporation (TNC) is "any enterprise that undertakes foreign direct investment, owns or controls income-gathering assets in more than one country, produces goods or services outside its country of origin, or engages in international production" (Biersteker 1978, p. xii). Variously termed multinational corporations (MNCs) and multinational enterprises (MNEs), transnational corporations are formal business organizations that have spatially dispersed operations in at least two countries. One of the most "transnational" major TNCs is Nestlé, the Swiss food giant; 91 percent of its total assets, 98 percent of its sales, and 97 percent of its workforce are foreign-based (UNCTAD 1998, p. 36).

TNCS AND THE GLOBAL ECONOMY

Although TNCs existed before the twentieth century (colonial trading companies such as the East India Company, the Hudson's Bay Company, and the Virginia Company of London were precursors of the modern TNC), only since the 1960s have they become a major force on the world scene (World Bank 1987, p. 45). Table 1 corroborates this by listing the foreign direct investment (FDI) stock of corporations by country from the beginning of the century to 1997. In 1900, only European corporations were major transnational players, but by 1930, American TNCs had begun to make their presence felt. The year 1960 marks the beginning of a new era in corporate transnationalization. In each of the decades from 1960 to the present, world FDI stock has more than tripled, whereas it only doubled during the first half of the century.

The phenomenal increase in transnational corporate activity in the latter part of the twentieth century can be accounted for in large part by technological innovations in transportation, communication, and information processing that have permitted corporations to establish profitable worldwide operations while maintaining effective and timely organizational control. The actual difference in foreign direct investment up to and after 1960 is even greater than the figures in Table 1 indicate. FDI for 1960 and before includes foreign portfolio investment, which is undertaken mainly by individuals, as well as foreign direct investment, which almost always is made by TNCs. These two types of investment were not reported separately for most countries before 1970. Thus, total FDI stocks are inflated. For example, Wilkins (1974, pp. 53–54) reports that in 1929–1930, U.S. foreign portfolio and direct investments were almost equal. American direct investment abroad was only $7.5 billion; the remaining $7.2 billion recorded in Table 1 was foreign portfolio investment.

Table 1 reveals that TNCs from only eleven countries accounted for almost 85 percent of all FDI in 1997. American TNCs accounted for more than one-quarter of total foreign investment, and

corporations based in the Triad (United States, European Union, and Japan) were responsible for nearly four-fifths of world FDI stock (UNCTAD 1998, pp. 379–384). Clearly, TNCs largely operate out of and invest in the developed countries of the global economy.

The magnitude of FDI flow in the world is revealed by the fact that worldwide sales of foreign affiliates in 1997 totaled $9.5 trillion, almost one and a half times more than world exports of goods and services of $6.4 trillion (UNCTAD 1998, p. 5). Global sales of affiliates are considerably more important than exports in delivering goods and services to markets worldwide, underlining the importance of TNCs in structuring international economic relations. In 1997, 53,607 TNCs controlled nearly 450,000 foreign affiliates throughout the world (UNCTAD 1998, p. 4).

Table 2 presents the top 30 TNCs ranked by foreign assets. Although fewer than one-quarter of these corporations are American in origin, most names are well known in the United States. It is the nature of transnational enterprise to generate this degree of familiarity. Among the top 100 TNCs in terms of foreign assets, 41 originate in the European Union, 28 in the United States, and 18 in Japan (UNCTAD 1998, p. 317). Most FDI inflows and outflows take place within the Triad. In 1996, approximately one-quarter of all foreign sales was accounted for by these top 100 firms. Among the major industries in which these TNCs operate, electronics and electrical equipment account for the largest number (17), followed by chemicals and pharmaceuticals (16), automotive (14), petroleum and mining (14), and food and beverages (12). In 1996, these transnational giants employed nearly 6 million foreign workers (UNCTAD 1998, pp. 35–43).

REASONS FOR BECOMING TRANSNATIONAL

The move toward integrated transnational investment can be seen as a logical and rational decision by business enterprises to adapt to their environment.

Historically, there have been several distinct strategies: (1) expansion in the size of operations to achieve economies of scale, (2) horizontal integration, or the merging of similar firms to increase market share, (3) vertical integration, or the acquiring of firms that either supply raw materials (backward integration) or handle output (forward integration) to attain greater control, (4) spatial dispersion or regional relocation to expand markets, (5) product diversification to develop new markets, and (6) conglomeration or mergers with companies on the basis of their financial performance rather than what they produce (Chandler 1962, 1990; Fligstein 1990). Establishing an integrated TNC simply represents a new strategy in this evolutionary chain. Furthermore, depending on how a corporation is set up and with recent innovations in communications and information technology, a TNC can incorporate all these strategies so that the newly structured enterprise has far greater control and a much less restricted market than it had previously.

Table 3 presents a list of reasons why it may be profitable for an organization to become transnational. First, direct costs for raw materials, labor, and transportation as well as indirect cost considerations such as tariff barriers and trade restrictions, local tax structures, and various government inducements obviously loom large in the decision to establish operations transnationally. Second, market factors may be equally important in that decision. Direct and easy access to local markets unfettered by foreign trade quotas and other legislative restraints can give TNCs an edge over their nontransnational competitors. Finally, the decision to become transnational may hinge on factors related to organizational control. Control over raw materials (backward integration) and markets (forward integration) and achieving sufficient regional and product diversification to withstand temporary economic downturns are other reasons for transnational relocation.

TNCS, NATION-STATES, AND GLOBALIZATION

Integrated TNCs traversing real-time electronic networks that span the global economy have produced a "borderless world" (Ohmae 1991). These technologically enhanced corporations also operate in the nonnationally controlled interstices of the planet (i.e., oceans, seabeds, airwaves, sky, and space), sometimes leaving toxic, life-threatening indicators of their presence. Existing in a sort of parallel world, they are responsible only to amorphous groups of shareholders. Gill and Law (1988, pp. 364–365) state that there is a "growing lack of congruence between the 'world economy,' with its tendencies to promote ever-greater levels of economic integration, and an 'international political system' comprised of many rival states." The rivalry between these two systems of world organization is revealed by the fact that 51 of the 100 largest economies in the world are TNCs (Karliner 1997).

The increasing domination of the world economy by TNCs directly challenges national sovereignty. Historically, the sovereignty and therefore the power of a nation-state lay in its ability to achieve compliance with whatever it commanded its territorially defined space. Borderlines physically defined what was territorially sovereign and what was not. If a state's sovereignty was challenged from outside its territory, it could resort to force to maintain control. However, as a result of various technological developments, the idea of a physically bounded and sealed state is now open to question. These developments underlie the transnational corporate threat to state sovereignty along the following three dimensions:

1. Permeability of borders. Borderlines between nation-states have been rendered permeable and porous in a number of innovative ways, erasing many of the traditional distinctions between "inside" and "outside." For example, what borders do electronic communications and atmospheric pollutants observe? Under whose borders do oil and gas reserves lie? Do space satellites invade territorial integrity? The new permeability of borders diminishes the capacity of nation-states to distinguish and determine what occurs "inside" their territory.
2. Mobility across borders. Developments in transportation, communication, and information technology not only have increased the rate of cross-border mobility among TNCs but also have increased the speed or velocity with which cross-border transactions take place. Concurrently measuring both the location and the velocity of TNC activity often produces "uncertain" results, generating "inderminacy" for a state.
3. Border straddling. To the extent that TNCs operate simultaneously in different sovereign jurisdictions, which jurisdiction has precedence over which corporate activities at what time? This complex issue blurs the legal boundaries between states. It also confuses the notion of "citizenship" and its attendant rights and responsibilities.

Through the use of these and other innovative strategies, TNCs have manipulated the concept of borders to their advantage. What exactly is the advantage that TNCs achieve through their cross-border flexibility? They gain between-border variability. The fact that different states have different laws and standards regarding all aspects of economic activity contributes to the power of TNCs that strategically play off one country's set of rules against another's. For example, variations in national laws on tariffs, financing, competition, labor, environmental protection, consumer rights, taxation, and transfer of profits are all carefully weighed by TNCs in deciding where and how to conduct business. Together, these considerations form what has come to be known as "the policy environment" (UNCTAD 1993, pp. 173–175). In the internation competition to attract foreign investment by creating a "favorable policy environment," between-border variability encourages a "race to the bottom" (Chamberlain 1982, p. 126), resulting in a continuing erosion of sovereignty. Whereas TNCs operate in a de facto borderless world created by technological ingenuity, de jure political and legal distinctions still mark the boundaries on a world map composed of nation-states. This represents the crux of the inherent conflict between TNCs and nation-states as they are currently structured.

Never before has there been a situation in which foreign organizations have been granted license almost as a matter of course to operate freely within the legally defined boundaries of a sovereign state. This, together with the fact that TNCs and nation-states are different organizational forms, established for different purposes, administered by different principles, and loyal to different constituencies, means that structural problems are bound to arise.

TNCS AND WORLD DEVELOPMENT

Although only 30 percent of FDI stock is in developing countries (UNCTAD 1998, p. 373), because of the immense power of many TNCs, great concern has arisen about the impact of TNCs on world development. Because the goals of transnational capitalist enterprise and indigenous national government are fundamentally different, many scholars have debated whether TNCs are an aid or a hindrance to world development. According to Biersteker (1978), the major points of contention in this debate are the degrees to which TNCs (1) are responsible for a net outflow of capital from developing countries, (2) displace indigenous production, (3) engage in technology transfer, (4) introduce capital-intensive, labor-displacing technologies, (5) encourage elite-oriented patterns of consumption, (6) produce divisiveness within local social structures owing to competing loyalties to TNCs and nation-states, and (7) exacerbate unequal distributions of income.

In a study of many of these issues, Kentor (1998, p. 1025) analyzed a fifty-year data set consisting of seventy-five developing countries to determine whether the modernization thesis (i.e., FDI in developing countries promotes "economic growth by creating industries, transferring technology, and fostering a 'modern' perspective in the local population") or dependency theory (i.e., FDI results in disarticulated economic growth, repatriation of profits, increased income inequality, and stagnation) better explains the long-term results of foreign direct investment. Kentor (p. 1042) summarizes his findings as follows:

The results of this study confirm that peripheral countries with relatively high dependence on foreign capital exhibit slower economic growth than those less dependent peripheral countries. These findings have been replicated using different measures of foreign investment dependence, GDP data, countries, time periods, and statistical methods. This is a significant and persistent negative effect, lasting for decades. Further, a structure of dependency is created that perpetuates these effects. The consequences of these effects, as described in the literature, are pervasive: unemployment, overurbanization, income inequality, and social unrest, to name a few.

Given current conditions, it would appear that overreliance on foreign investment by developing countries will widen the already huge global rift between rich and poor nations.

TNCS AND REGULATION

In the late 1960s, the United Nations (UN) reached the opinion that "transnational corporations had come to play a central role in the world economy and that their role, with its transnational character, was not matched by a corresponding understanding or an international framework covering their activities" (UNCTC 1990, p. 3). In the 1970s, the UN produced a draft "Code of Conduct on Transnational Corporations." However, twenty years later, after much political wrangling, UN delegates concluded in 1992 that "no consensus was possible on the draft Code," and thus the process of trying to achieve some effective legal reconciliation between the goals of TNCs and those of host governments was brought to "a formal end" (UNCTAD 1993, p. 33).

Currently, although several international voluntary guidelines monitor the activities of TNCs, generally they have not been very successful (Hedley 1999). As of 1997, 143 countries had legislation in effect that specifically governs foreign direct investment (UNCTAD 1998, p. 53). Although initially most of those laws were framed to control the entry and regulate the activities of TNCs, legislative changes increasingly have become more favorable to foreign investment. For example, from 1991 to 1997, of the 750 changes to foreign investment policy made by countries worldwide, 94 percent were in the direction of liberalization (UNCTAD 1998, 57). In 1997, in attempts to ease high debt loads and survive a worldwide economic downturn, seventy-six developed and developing countries introduced 135 legislative inducements along the following lines: more liberal operational conditions and frameworks (61), more incentives (41), more sectoral liberalization (17), more promotion (other than incentives) (8), more guarantees and protection (5), and more liberal entry conditions and procedures (3) (UNCTAD 1998, p. 57). In their competition to attract foreign investment by creating favorable policy environments, these countries are yielding ever more control to TNCs.

Given the increasing dominance of TNCs in the global economy, the reasons why corporations become transnational, the diminishing sovereignty of nation-states, and the long-term effects of FDI on world development, one may question whether the move toward liberalization is in the interests of the countries and people who are encouraging it. What is called for is nothing short of a revolution in world governance. To regulate transnational corporations, it is necessary to introduce trans- or supranational legislation. To maintain national sovereignty in a global economy, authority must be coordinated and shared across borders. Legislative harmonization, although entailing an initial loss of sovereignty for participating states, can restore their authority over TNCs operating within their jurisdictions. By these means, corporate accountability can be imposed according to the needs and wishes of civil society. Whether or when such legislative harmonization will occur is open to question. However, in the view of the U.S. Tariff Commission, "It is beyond dispute that the spread of multinational business ranks with the development of the steam engine, electric power, and the automobile as one of the major events of economic history" (cited in Lall and Streeton 1977, p. 15).

references

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R. Alan Hedley