A transnational corporation, also known as a multinational corporation, is a corporation that has a home base, but is registered, operates and has assets or other facilities in at least one other country at one time. These corporations have a headquarters in one country.
They often separate their production between various locations, or have their different divisions – Head Office and Administration, Research and Development, Production, Assembly, Sales – separated around a continent or the globe.
Characteristics of Transnational Corporations
When a corporation plateaus in growth, especially where demand is concerned, they often seek to expand in other countries for that additional growth. While this is what often makes a corporation a transnational corporation, it isn’t without controversies. The following characteristics are often associated with a transnational corporation:
- Transnational corporations may not be loyal to all of the countries they operate in, and look to maintain their own interests. In other words, they’re mainly concerned about what’s best for them even if it’s at the expense of the other country’s values or standards.
- Transnational corporations avoid high tariffs involved in importing when they set up in foreign countries. This allows a corporation to cut costs, but it’s not always in the most honest way.
- They reduce costs by using foreign labor at a cheaper price than they would in their home country.
- They block competition by acquiring businesses. If they purchase foreign companies, they will not have as much competition.
- They may have political influence over some governments. This means that they may use their power to convince some governments to support their practices.
- They can create a loss of jobs in their home country.
- They can minimize taxes. The IRS has to study transnational companies very thoroughly to make to make sure they are paying taxes correctly.
Reasons for growth of TNCs
- Global expansion of a major product with worldwide markets, such as Coca Cola
- Take-over of foreign competitor firms, such as BMW
- Merger with foreign firms into one large international company, such as GlaxoSmithKline
- Vertical integration: acquiring the companies that sell you materials and components, and/or that you sell on to for manufacture, assembly or sales.
- Horizontal integration: acquiring the companies that make similar components that, along with yours, will go into the final product.
- Diversification: using the profits from one major company to purchase companies dealing with different products in order to spread risks from loss of sales or financial fluctuations.
- Risk dispersal: firms may find it advantageous to distribute their plants in a range of countries so that union disputes, government instability, supply disruptions and financial uncertainty in any one country does not disrupt overall production. Production can be switched to alternative plants relatively quickly if need be.
- Profit maximisation: firms may set up divisions abroad for a range of reasons:
- Locate in low business-tax countries and ensure their profits are registered there so they pay minimum tax. Ireland has one of the lowest tax regimes in the EU at 12.5% (20% in UK) and attracts many US firms marketing to Europe.
- Locate to avoid trade tariffs and tax barriers. Some Japanese car firms set up plants inside the EU to avoid import taxes being imposed on cars from Japan.
- Locate in low production-cost countries where wages are lower. As these are often the single largest cost for a firm, locating production in low-wage economies can maximise profits at a stroke.
- Locate in low-regulation countries where there are fewer laws (or less regulation/enforcement) governing employment rights, trade union rights and environmental protection.