Notes on Transnational Corporations
and the U.N.U.'s Course on Transnational Corporations
-by Róbinson Rojas - 1996
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- Definitions
- 20 complaints about TNCs
BOX 1 High Technology.-How Europe can fight the multinationals
BOX 2 The use of capital intensive-technologies
BOX 3 Transfer pricing and expensive technology
BOX 4 Effects on balance of payments
BOX 5 U.S. trade and U.S. TNCs
- U. N. University: The course on transnational corporations:
STUDIES ON TRANSNATIONAL CORPORATIONS
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The first and most important notion about TNCs is that they
dominate the economy of their home countries, and the world
trade. Apart from the latter, they dominate most of the
economies in less developed societies where they invest. Because
of the above, their economic and political power is enormous,
and because they are the most refined expression of the capitalist
system, they are engines not only creating economic growth, but
also social and economic exclusion, wealth and poverty, and
political systems which are less and less democratic.
The second notion about TNCs is that their home countries are
concentrated in the United States, Japan, United Kingdom, Germany
and France. Because of the above, they impose the so-called
"Western European-American way of life" on a variety of cultures
in Latin America, Africa and Asia, creating a situation of
cultutal imperialism, added to the economic and political ones.
The third notion about TNCs is that because they are so
important in the political, cultural and economic life of the
human race, it is necessary to study them scientifically. There
is no possibility of studying development without a sound
understanding of how TNCs organize world production of good and
services, flow of capital, knowledge and cultural habits. Therefore,
the last section on this paper ( and items 14 to 30 in DEVELOPMENT)
present a set of notes about a course on TNCs, mainly based on the
University Curriculum on Transnational Corporations, United Nations,
1992, but amended where it was necessary by Róbinson Rojas.
I do recommend reading World Investment Report 1996
and O. Sunkel, The international corporate system.
DEFINITIONS
[ necessary definitions: a transnational corporation ( or
multinational corporation ) is defined in RROJAS RESEARCH UNIT as
a group of corporations that is operating in different countries but
is controlled by its headquarters in a given country. Transnational
corporations participate in international business -international
business can be defined as those business transactions among
individuals, firms, or other entities {both private and public} that
occur across national boundaries- through channels of entry including
exporting, licensing, franchising, TNC-owned foreign enterprises
(joint ventures and wholly owned subsidiaries), management contracts,
and turnkey operations.
A TNC can manufacture products in a foreign country by signing a
licensing agreement with an independent foreign firm that obtains the
right to produce and sell the product in return for a modest fee.
Franchising involves granting permission to a foreign firm to produce
a product and to use its name, trademark, or copyright, in return for
a fee and royalties (based on a contract). A TNC may have part
ownership, which is a joint venture, or complete ownership, which is
a wholly owned subsidiary, of its foreign production and marketing
operations. In a management contract, a company provides managerial
assistance to another company in return for a fee. A turnkey
operation is an arrangement by which a TNC agrees to construct an
entire facility or plant, prepare it for operation, and then turn
the key over to the local owners, for a fee.
The United States is the world's major exporter, the major investor,
and the major recipient of foreign direct investment (FDI) (year 1995)
(see BOX 5).
20 COMPLAINTS ABOUT TNCs
The subject of TNCs is highly controversial attracting a variety
of complaints by host countries against these big corporations. See
BOX 1 for the case of TNCs in industrialised countries. By and large,
the major criticisms, especially in connection with TNCs' activities
in less developed societies, are as follows:
1.- They raise needed capital locally, contributing to rise in
interest rates in their host countries. By the same token, they
make local capital, in relative terms, even more scarce, blocking
domestic investment from growing, or forcing domestic investments
to be financed through loans from abroad.
2.- The majority (sometimes even 100 percent) of the stocks of a
TNC's subsidiary is owned by the parent company. Consequently,
the host country's residents do not have much control over the
operations of these corporations within their borders.
3.- They reserve the key managerial and technical positions for
expatriates. As a result, they do not contribute to the "learning-
by-doing" process in host countries.
4.- They do not provide training for host countries' workers.
5.- They do not adapt their technology to the conditions that exist
in host countries. In less developed societies TNCs have used
capital-intensive technologies that are inappropiate for labour-
abundant developing economies ( see BOX 2 )
6.- They concentrate their research and development activities in
their home countries. As a result, they restrict the transfer of
modern technology and know-how to host countries.
7.- The give rise to demands for luxury goods in host countries at the
expense of essential consumer goods.
8.- They start their foreign operations by the purchase of existing
firms, rather than by developing new productive facilities in host
countries.
9.- They do not contribute to host countries' exports.
10.- They worsen the income distribution of host countries.
11.- They do not observe the objectives of the host countries'
national plans for development.
12.- They earn excessively high profits and fees, due to their
monopoly power in host countries. They utilise the technique
called "transfer pricing" (see BOX 3) to earn abnormal profits
avoiding taxation. The above exerts a negative pressure on
balance of payments.( see BOX 4).
13.- They dominate major industrial sectors.
14.- They are not accountable to their host nations, only to their
home governments.
15.- They contribute to inflation by stimulating demand for scarce
resources.
16.- They recruit the best personnel and the best managers from host
countries at the expense of local entrepreneurs. See BOX 1.
17.- They form alliances with corrupt (and non corrupt) developing
societies elites ( See R. Rojas, "The Murder of Allende", and
R. Rojas, "Latin America: Blockages to Development", on this
databank ).
18.- They interfere with political conditions of developing host
societies.
19.- They disregard the impact of their actions on consumer safety and
environmental conditions.
20.- They disregard the cultural and social impact of their actions
on host countries.
(see sources at the end)
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==BOX 1 ==High Technology.-How Europe can fight the multinationals===
by Michael Butler (The Financial Times, 05/01/1986)
I have heard respectable people argue that it does not matter if
European high technology companies are taken over one after the other
by American or Japanese multinationals. If the market so decrees let
no man intervene!
This needs to be thought through. The multinationals are in
Europe TO PROMOTE THEIR PARENT COMPANIES' strategy for gaining world
market share and MAXIMISING THEIR LONG-TERM PROFITS. As part of that
strategy they may do some manufacturing in Europe and even some
research. BUT THEIR POLICY IS DECIDED IN THEIR HEADQUARTERS AND THE
MAJORITY OF THEIR PROFITS FLOW THERE. Once they have knocked out or
taken over the European competition, they are free to shift the
balance of their investment in plant and research towards home OR TO
OTHER MARKETS YET TO BE CONQUERED. If Boeing in aircraft, or IBM in
information technology, can achieve a still more dominant world
market share than they have now, THE TEMPTATION TO BEHAVE LIKE
MONOPOLISTS WILL BE GREAT. European industry in other fields will
suffer. STILL MORE PROFITS, INVESTMENT AND RESEARCH WILL FLOW HOME.
BRAINS WILL FOLLOW THEM.
Among the reasons why European companies are loosing market share
is that there are too many European "national champions". Two
Japanese companies spent $1.5 bn on developing digital switching
systems, three American companies $3 bn and 10 separate European
companies $10 bn. It is not the Europeans who are winning. Another
reason is that Japanese and American competitors, in different ways,
enjoy major advantages. US public purchasing rules, such as Buy
American, favour US companies -but US Government controls on the
outflow of technology hinder European companies.
Vast space and defence expenditure underpin American companies'
research and investment. European governments compete with each other
in giving Japanese and American incentives to invest in the EEC in
high technology fields which produce least jobs and are most
dangerous for European companies.
The European Community is already taking some essential steps,
creating a single great market by 1992 and helping small and medium-
sized enterprises.But these things, excellent in themselves, will not
solve the problem. The multinationals will be as well placed as
anyone to prosper in the single market and only large enterprises can
find the funds for research and marketing needed to climb towards the
crucial threshold of 5 per cent of the world market.
What then can be done? Protectionism would make Europe still more
uncompetitive. More Government money is not the answer. Pooling basic
research efforts could help but only marginally. In Eureka,
governments are seeking out the legal and fiscal obstacles to
European co-operation. They will find some serious ones and it would
be helpful if rapid action could be taken to remove them, presumably
through European Community legislation. For the basic idea behind
Eureka, that European companies need to co-operate in order
to survive, is right. Action is needed this year.
But more is required; and time is short. The British Government,
which has the chair of Eureka until June and of the Community from
July, is well-placed to give a lead. Here is a menu for early action:
* First, the British proposal for a Eurotype warrant which would open
all public purchasing to the products of co-operation between
European companies, should be adopted this year.
* Second, the Community should tell the US Government that the time
has come for reciprocity in public purchasing.
* Third, the Community should also seek reciprocity on the transfer
of technology. It is time to take a common position on American
restrictions.
* Fourth, national and Community competition rules should be
interpreted as applying to the world market. It makes no sense to
prevent European companies from getting together in fields where
the outside competition is more than strong enough to keep them on
their toes without competing with each other.
* Fifth, Community Governments should agree to a self denying
ordinance not to give investment grants to non-European high
technology companies which would threaten European companies in
their field.
* Sixth, all Community Governments should review their own investment
and innovation incentives to ensure that they promote rather than
discourage European co-operation.( The British Business Expansion
Scheme specifically excludes it. )
Schemes to promote European co-operation must apply to genuinely
European companies, those with their headquarters in European
countries and of which the major part of the profits remain in Europe.
The multinationals will oppose this idea. Some have put a lot of
effort into convincing Governments that they themselves are European,
because they have subsidiaries incorporated in Europe and manufacture
there. That is an illusion and the nettle must be grasped. The US
Government knows which are American companies. We know which are
European.
These are things the European Community can do to make it easier
for our companies to co-operate. But in the end it is the companies
who have to do the biggest thing. They have to forget that they are
long-standing rivals and remember the danger of hanging separately if
they do not stand together. They have to make deals under which each
produces complementary products and buys them from each other. They
have to form joint venture companies to produce hardware and, indeed,
whole IT systems. They have to find ways of pooling their marketing
efforts, either for particular products or by region.
It will not be easy. Ways of thinking must be changed in the
European Commission, in Governments, in boardrooms and in middle-
management. That usually takes a long time. We haven't got it.
--------------
Sir Michael Butler was until last year (1985) Permanent UK
Representative to the European Community.
================================================end BOX 1=====RROJAS
==BOX 2====THE USE OF CAPITAL-INTENSIVE TECHNOLOGIES=================
= Of course, this behaviour of TNCs is just the outcome of the
dynamics of the capitalist system, whose main motive force is
maximizing profits. Thus, in accordance with the main stream
literature, this tendency to use capital-intensive technologies
can be attributed to the following factors:
A.- Engineers who design a plant for a TNC are ussually trained
according to an advanced country's curricula. Thus, an engineer's
interest is in TECHNICAL EFFICIENCY, that is, to produce the
maximum amount of output from a given amount of input. Given such
orientation, machines are often considered more efficient than
humans, a capital-intensive technology is chosen.
B.- In some industries, such as chemicals, petroleum refining, and
steel, capital-labour ratios are not alterable to a significant
degree. Thus, capital and labour should be combined in a
relatively fixed proportion. As a result, there may be no
substitute for a highly capital-intensive technology.
C.- In many developing societies, the technical, administrative, and
managerial resources needed to implement labour-intensive
technology are scarce. As a result, it may be cheaper for a TNC
to use a capital-intensive technology, conserving expensive
personnel.
D.- TNCs may find that modifying their capital-intensive technology
is more expensive than employing it without modification.
E.- The policies of some developing countries may make capital
cheaper than its equilibrium price, that is, the price determined
by market forces of demand and supply. The cheaper capital, in
turn, may encourage the use of capital-intensive technology.
Policies that lead to factor market distortions include minimum
wage legislation, capital subsidization, and artificially low
foreign exchange prices. The minimum wage legislation, resulting
from organized labour pressure, artificially raises the level of
wages in a developing country and discourages the use of a
labour-intensive technology. On the other hand, capital subsidies
and low foreign exchange prices, designed to promote
industrialization, encourage the use of a capital-intensive
technology.
=========================================================end BOX 2===
==BOX 3====TRANSFER PRICING AND EXPENSIVE TECHNOLOGY=================
Because the market for technology is highly imperfect and pricing
information is not readily available, the pricing for technology
transfer represent a complex issue (or an instance of criminal
behaviour), which is further complicated by what is known as TRANSFER
PRICING. Transfer pricing refers to the pricing of goods and services
that pass between either a parent company and its subsidiaries or the
subsidiaries themselves. Because transfer pricing are set by the
corporate family when dealing with each other, the prices may not
reflect market prices. Often a market price for a particular good or
service may not even exist. As a result, a TNC may use transfer
pricing to minimize taxes or to overcome foreign exchange controls
that prohibit the repatriation of funds.
Because tax rates are different between nations, a parent company
exporting goods and services to a subsidiary in a high-tax nation
(compared to the taxes charged in the home country) could set a high
transfer price. This has the effect of decreasing the profits of the
foreign subsidiary and lowering taxes in the host country. In the same
manner, if the subsidiary is located in a low-tax nation, A TNC could
minimize taxes by charging a low transfer price. However, if import
tariffs are present, the TNC will consider both taxes and tariffs in
formulating the transfer pricing policy because a high transfer price
means a high value for the goods and services sold. Similarly, a low
transfer price means a low value for the goods and services sold.
Because import tariffs are imposed on the declared value of imports,
this leads to a higher or lower tariff cost depending on the case, a
TNC should measure the tax benefit of a higher or lower transfer price
against the resulting higher or lower tariff cost. A high transfer
price will be charged if the savings on the host country's taxes are
greater than the additional tariff costs. A low transfer price will
be used if the savings on tariffs are greater than the additional
taxes.
Foreign exchange controls prevent repatriation of funds by TNCs.
To circumvent such controls, a TNC can charge high transfer prices
to its subsidiaries, thus repatriating profits from those host
countries that impose foreign exchange controls.
Other circumstances in which a TNC may use transfer pricing to
minimize its costs occur when taxes are imposed on dividens or when
a host country's currency is rapidly depreciating. Because dividend
taxes, in essence, tax the TNC's profit twice, the firm can transfer
funds using a high transfer price instead of repatriating dividends.
If a host country's currency is rapidly depreciating, the TNC can
protect itself by adopting a high transfer pricing policy. This allows
the TNC to exchange the depreciating currency for stronger currencies,
thus minimizing the exchange losses that may result from the weaker
currency. ( See P. Asheghian, "International Economics", West
Publishing Company, USA, 1995, ch. 17 )
===============================end BOX 3=====================rrojas===
==BOX 4===EFFECTS ON BALANCE OF PAYMENTS==============================
IMPACT OF THE 115 LARGEST TRANSNATIONAL CORPORATIONS ON BRAZIL'S
BALANCE OF PAYMENTS, 1974
(Millions of dollars)
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Share of
Brazil Transnational TNCs in
Account total corporations category(%)
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Trade:
Exports 7,951 838 11
Imports 12,635 2,999 24
Balance -4,684 -2,162 46
Service:
Interest -637 -85 13
Profit and Dividend -248 -125 50
Other -1,578 -- --
Total -2,463 -251 10
Current transactions
balance -7,147 -2,413 34
Capital:
Net investment 887 45 5
Loans 7,370 614 9
Amortization -1,940 -63 3
Other -82 -- --
Total 6,235 596 10
Surplus or deficit -938 -1,817 194
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Source: United Nations Centre on Transnational Corporations,
"Transnational Corporations and International Trade: Selected
Issues", United Nations, New York, 1985, p. 17.
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Ibid., op. cit., page 33:
TRANSFER PRICING.- On a theoretical level there are a number of
factors which could influence the behaviour of prices in international
transactions. An important one is ownership. Transnational
corporations may use their superior information on world markets and
possible market power to use transfer pricing practices designed to
maximize global profits or minimize the risk and uncertainty inherent
in foreign operations. The evidence from empirical studies, although
subject to substantial criticism, has generally supported the
conclusion that transnational corporations often engage in transfer
pricing to their advantage ( Vaitsos, C., "Inter-country income
distribution and transnational enterprises", Oxford, Clarendon Press,
1974, and, United Nations Conference on Trade and Development,
"Dominant positions of market power of transnational corporations: use
of the transfer pricing mechanism", United Nations, New York, 1978)
==================================================end BOX 4=====RROJAS
==BOX 5===U.S. TRADE AND U.S. TNCs==================================
Composition of United States trade associated with United States
transnational corporations
(Millions of dollars; figures in parentheses are percentages)
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1966 1977 Change
Exports Imports Exports Imports Exp. Imp.
(%)
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1.Total United States trade 29,287 25,463 117,963 146,946 303 477
2.United States manufactured
trade [a] 23,461 17,493 94,793 86,594 302 395
3.United States trade
associated with trans-
national corporations 19,186 11,708 95,764 80,930 405 603
(66) (46) (81) (55)
Of which:
Trade between parent
and majority-owned
affiliates 6,323 5,088 29,275 30,880 363 507
(33) (43) (31) (38)
Trade between majority-
owned affiliates and
other United States
residents 1,359 1,212 6,539 7,120 381 487
(7) (10) (7) (9)
Trade between parent and
other foreigners 11,476 5,408 59,952 42,929 422 694
Of which:
Trade between parent and
minority-owned affiliates ... ... 2,532 1,342 ... ...
Not included in item 3:
Trade between unaffiliated
United States persons and
minority-owned affiliates ... ... (1,126) (1,433) ... ...
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Sources: Barker, B., "United States foreign trade associated with
United States multinational companies", SURVEY OF CURRENT
BUSINESS, 1972, and United States Department of Commerce
Statistics.
[a] Excluding all imports and exports associated with United States
transnational corporations whose main industry is petroleum and
petroleum products.
=================================end BOX 5==============rrojas========
THE COURSE ON TRANSNATIONAL CORPORATIONS
==============================================================
This course is based on University Curriculum on Transnational
Corporations, Volumen I, Economic Development, United Nations,
1991, ST/CTC/62. Modifications, addenda and improvement was
the responsibility of Dr. Róbinson Rojas
----------------------------------
This is a synopsis of a lecture course on Transnational Corporations
and Economic Development...It is intended for students with a first
degree in Economics, Political Economy or Business Studies, and its
purpose is:
to describe, interpret and evaluate the interaction
between transnational corporations and the economic
and social development of the countries in which they
operate, both host and home countries
as far as possible the course takes a neutral political
stance towards both TNCs and economic systems; and
seeks to present the main views and persuasions as
objectively as possible (factual)
at the same time, the course focus some of its
attention on the political, social and cultural
effects of the activities of TNCs both in home
and host countries
The course is divided into six main parts:
the first (sessions 1-3) describes and interprets the
growth of the modern TNC and its role in
the international economy
the second (sessions 4-8) describes and evaluates
the main theories of international production
and the strategies underlying TNC behaviour
the third (sessions 9-14) examines the way which modern
TNCs are organised and the structure of
decisions taking. Such an understanding is
essential to appreciate the options open to
TNCs in both influencing and responding to
the policies and programmes of government
the fourth (sessions 15-34) examines the impact of TNCs
on various areas of the development process
chiefly from the viewpoint of the recipient
country
the fifth (sessions 35-38) deals first with the reactions
of individual nation states towards the TNCs
and the policy options to them to ensure that
TNC behaviour is consistent with national
goals, and second the actions which might
be taken at a multilateral level
the sixth(sessions 39-40) speculates about the future
of TNCs in the World Economy
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STUDIES ON TRANSNATIONAL CORPORATIONS
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The nature and scope of TNCs activity
The following should be described and understood in order to make
sense of the nature of TNCs and their relevance to the study of
economic development:
1 Definitions and terminology
a) alternative nomenclature for and definitions of a TNC
b) distinction among definitions based on:
i) Foreign Direct Investment (FDI) (the threshold definition)
ii) extent and significance of foreign production
iii) international or transnational strategies of firms
iv) internalisation of intermediate product markets
v) the firm as an organiser of cross-border production and
transactions
c) the nature of international production, i.e. value added
undertaken by TNCs outside country of origin
i) equity participation - foreign direct investment (see 1.2b)
ii) non-equity TNC involvement i.e. inter-firm contractual and
cooperative agreements (see 1.2c and b)
iii) the issue of control; TNC hierarchies, galaxies and networks
iv) varying practical definitions of foreign direct investment
by different countries
d) the ownership of TNCs; e.g. of bilateral TNCs such as Unilever,
Royal Dutch Shell; the multinational spread of equity
participation in TNCs
---------------------------------------------------------
UNCTC (1978)(1983)(1988)
Frank(1980) Moran(1986) Weigel(1988)
Vernon(1971 and 1977)
Billerbeck and Yasugi(1970) Jenkins(1987)
Lall(1973) Hymer(1972,1979) Bierstecker(1978)
Newfarmer(1985) Bornschier and Chase-Dunn(1987)
Palma(1978)
See Bibliography
-- RRojas Research Unit/1996
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