1 Devendra Asked: July 18, 2019In: Commerce Why do Firms become transnational? Discuss various theories explaining emergence of Transnational Corporations in the world economy 1 1 Answer Voted Oldest Recent Best Answer admin Added an answer on July 18, 2019 at 9:08 am The firms become transnational due to number of reasons. The .major reasons are discussed below: To protect themselves: Firms are aware of the risks and uncertainties of the domestic business cycle. By establishing operations in another country, they can often reduce the negative impact of economic swings of the one country. To tap the growing world market: As a result of globalization, the rapid growth of identical goods and services is produced and distributed by TNCs globally. Companies want to tap such a growing global market for goods and services. Response to the increase in foreign competition: The Firms become transnational in response to increased foreign competition and to protect world market shares. In order to follow the competitor’s strategy, the firm sets up operations in the home countries of competitors. To reduce costs: TNCs set up operations close to the foreign customer to reduce costs. By doing so, they can eliminate transportation costs, avoid the expenses associated with having middlemen to handle the product, respond more accurately and rapidly to customer needs and take advantage of local resources. To reduce tariff: The firms may overcome tariff walls by serving a foreign market from within. For example firms producing the goods within the European community can transport them to any other country in the bloc without paying tariffs. To take advantage of technological expertise: In order to take advantage of technological expertise, the firms manufacture goods directly in the foreign market. The direct involvement in foreign markets brings the company closer to increasing technological developments. They are prepared to respond by acquiring new technology. Thus, they are able to protect their international competitiveness. THEORIES EXPLAINING EMERGENCE OF TNCs IN WORLD ECONOMY The growth of TNCs has been a subject matter of great concern for various reasons. While they have grown in importance as seen in the previous section in post-war period, their origin can be traced to the nineteenth century. A number of theories have been developed to understand and explain why an enterprise would like to invest in a foreign country in view of a large number of problems and risks that it could face in an alien environment. The foreign firm has to adjust to a new government, new culture and most often competition from the local companies which have many advantages. The foreign firm, it is further argued, can achieve its corporate goals by directly exporting and licensing its technology without risking its investment. Yet firms have chosen to invest. The theories on TNCs try to explain this phenomenon. Below are few major theories which try to explain the growth of TNCS in the post-war period. Stephen Hymer, one of the original contributors to the theory of TNCs emphasized that when a firm operating in imperfect market structure seeks monopoly rent which through the internalization of related activities can be increased and captured by the internalizing firm. This is also a market failure of the structural kind. An enterprise which innovates new products enjoys market domination in its home country. It could be an enterprise or a few enterprises. When a product gets standardized, a large number of national firms start imitating by producing similar products. The original producers in order to retain their domination move to other economies by establishing production units. These economies largely belong to the same income groups. Once these firms face competition in these foreign countries by the imitators, the original producer moves to other countries which are mainly developing countries. This theory was propounded by Raymond Vernon and is known as Product Life Cycle Theory. This theory very often applies to firms dealing with consumer products. Many like John H. Dunning, Mark Casson, have attempted to explain the ‘Theory of International Resource Allocation’ and the theory of ‘Market Failure’. Dunning puts it “Between them, we believe that these theories help to explain the origin of the Ownership Location and Internalization (OLI) advantages created or acquired by firms and strategic management of theirs”. The unique characteristic of the TNC is that it is both multi activity and engages in the internal transfer of intermediate products across national boundaries. In other words, it produces at different points of the value added chain and in different countries. Since firms which produce at more than one point on the chain necessarily engage in intra-firm rather than, or in addition to, inter firm transactions, and ate multi activity, this implies the existence of some kind of market failure, in the sense that whether within or between countries, firms are motivated to replace the market as transaction agent. When these activities are undertaken across national boundaries, then there is international market failure. It is the failure of the market to organize a satisfactory deal between potential contractors and contractees of intermediate products that explains why one or the other should choose the hierarchical rather than the market route for exploiting different factor endowment situations. The market failure arises from the inability of arms length transaction to perform efficiently. This might happen for three reasons: First, perhaps the most important factor, the difference between international and domestic failure, is the additional risk and uncertainty associated with cross border transactions. Such risks are particularly noteworthy in raw materials and high technology industries that typically incur high development costs where there is a danger of disruption of supplies or where there is likelihood of property rights being displaced or abused by foreign licenses. The second reason for transactional market failure is that the market cannot take account of the benefits and costs associated with a particular transaction between buyer and seller which accrue to one or another parties but which are external to that transaction The third reason for transactional market failure arises whenever the market is insufficiently large to enable firms to capture economies of size and scope when facing an infinitely elastic demand curve. Such economies may be in production or in purchasing, marketing, research and development, finance, organization and so on. The reasons for firms to produce abroad also include explanations minimizing tax burden and exchange risks. Companies are also expected to move their production centers across the border to derive advantages arising from cheap labour, plenty of raw materials etc. Production facilities are established by an enterprise across geographical and political areas which are policy induced. One variety is called Tariff Jumping Operations that are to overcome the restrictions imposed by the host country on imports of final products. Yet another approach is to receive the benefits offered by the host countries for foreign investment. There is no one theory. There could be a large number of explanations for a single firm to go abroad. It could be considered as Dunning points it, as eclectic theory. Identity of TNCs with their home countries USA, UK and Germany have been dominant home countries of the TNCs. This has led to raise questions whether TNCs coming from these respective countries have any different characteristic features. This question has arisen, in particular, in view of differences in the type of capitalism. Some scholars of capitalism and management argue that there is difference between the capitalism of Germany and Japan on the one hand and capitalism of USA and UK on the other. The former is called ‘Communitarian Capitalism’ while the latter is known as ‘individualistic’. In Communitarian capitalism the firms play a game termed as strategic conquests while Individualistic Capitalism of the US and the UK believe in consumer economics. The UK and the US capitalism maximize the profit and hence customer and employee relationship are the means of achieving higher profits. Similarly workers also seek higher wages and go in search of them. In Germany and Japan, especially Japan employees are primarily important and shareholder next. Profits can be sacrificed to maintain wages and employment. Further, banks and firms have collective strategy. Germany thinks of having a ‘Social Market’ and not just the market. Social welfare is part of the market. In the Anglo- Saxon market economy, social welfare policies would not be necessary. There are other differences as well. With regard to the national identities of TNCs there are clearly two view points. Some argue that there is a difference between the TNCs of leading countries. Hence their behavioral and the results of their transnationalisation are different. According to others, the transnationalisation process totally blurs the national identities and interests. Hence, there will not be any difference in the behaviour of Japan for instance, from that of the behaviour of TNCs from the US. The approach stems from the assumption that TNCs are ‘stateless’ corporations. In 1969, Charles Kindleberger wrote that international corporation has neither country to which it owes more allegiance than any other nor any country where it is completely at home. Over the last few years this approach has grown substantially. The latter view has been prominent in the context of TNCs of Japan. In the US, Robert, B. Reich has argued that while foreign direct investment coma to America from any country, it will become American, His famous statement attracted considerable attention.’ They are us’ “The cosmopolitan corporations eager to avoid appearances of national favoritism and … desirous of a familiar and reliable image wherever it does business around the world, also hires and promotes citizens of many nations to its executive ranks,. Others argue that the TNCs retain their national identities, objectives and character in their corporate behaviour. Then are no, it is further argued, such stateless corporations. TNCs from various countries do keep their national identities. For, they keep important R & D units in their home countries, boards of decision making of the parent consist of nationals of the parent country. Some thus say, ‘they are not us.’ 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerLeave an answerCancel reply Featured image Select file Browse Save my name, email, and website in this browser for the next time I comment.