Transnational Corporations (TNCs) and Foreign Direct Investment (FDI) Decisions

Knowledge-intensive production, technological change, shrinking economic  space greater openness have also changed the context for Transnational Corporations (TNCs). There are new  opportunities and pressures to  utilize  them. The opening of markets creates  new geographical space for TNCs to expand in and access tangible and intangible  resources. It also permits wider choice in the methods firms can use (FDI, trade,  licensing, subcontracting, franchising, partnering and so on) to operate in  different locations. At the same time, advances in information, communication  and transportation technologies, as well as in managerial and organizational  methods, facilitate the trans-nationalization  of many firms, including SMEs. The  combination of better access to resources and a better ability to  organize  production  trans-nationally  increases the pressure on firms to  utilize  new  opportunities, lest their competitors do so first and gain a competitive advantage.  Competition is everywhere – there are fewer and fewer profit reservations and  market niches that remain protected from the fierce winds of competition.  Indeed, a portfolio of locational assets – allowing firms to combine their mobile  advantages most effectively with the mobile tangible arid intangible resources of  specific locations – is becoming an increasingly important source of corporate  competitiveness.

Firms have reacted accordingly. A highly visible group of large “traditional”  TNCs continues to grow, often with turnovers larger than the national incomes  of many developing countries. There are also many new entrants, such as large  firms from developed countries that had confined themselves previously to  domestic operations (e.g., telecommunications operators). Many are smaller  firms from these countries that find it necessary to invest overseas to exploit  their ownership advantages or to see advantages and alliances. An increasing  number are firms from developing co both small and large. And some are large  and small firms from economies transition, countries that previously had  isolated them largely from international investment. As a result, the number of  TNCs has increased substantially, having reached at least 60,000 at the end of  the 1990s. Their growth rate was faster than that of both and domestic  production.

The changing context and the quest for a portfolio of locational assets has  brought about a change in corporate strategies. The following developments are  particularly noteworthy:

  1. A shift from stand-alone, relatively independent, foreign affiliates to integrated  international production systems relying on  specialized  affiliates to service the  entire TNC system. Within the framework of this international intra-firm  division of  labor   any part of the value-added chain of an enterprise can be  located abroad while remaining fully integrated into a corporate network.  Corporate strategies of this kind seek to exploit regional or global economies of  higher degree of functional  specialization.    This shift broadens the range of resources sought by TNCs in host countries  making firms more selective if their choices. However, it can also encourage in  countries that cannot provide a wide range of resources but haves, specific assets  that are sought by TNCs (eg. accounting or software skills).
  2. A shift towards greater use of non-equity and cooperative  relationship  with other  enterprises, such as alliances, partnerships, management contracts or  subcontracting arrangements. These arrangements serve a variety of corporate  objectives. They can provide better access to technologies or other assets firms  to share the cost and risk of innovatory activities. They can reduce production  cost of  labor-intensive products.
  3. Emergence of a network type of organisation. This expands the scope of  interactions between TNCs and enterprises from host countries, and also the  forms of these interactions.

These changing corporate strategies bring with them a different pattern of  international economic integration. Originally, this involved the integration of  markets through length trade “shallow” integration. Integrated international  production moves this integration to the level of production in all its aspects  “deep” integration. In process, a significant part of international transactions  becomes  internalized   i.e. the form of transactions between various parts of  transnational  corporate systems located in different countries. It is estimated that  more than one-third of world trade some four-fifths of technology flows are  internalized  within TNCs. The share of world production under the common  governance of TNCs is estimated at one-quarter.

The ability of firms to allocate their economic assets internationally, and the  international production system created in the process, have become themselves  a part of the new global system. As a result, TNCs have indeed become  important actors in the world economy and, hence, the development process – a  fact reflected in the competition of all countries for FDI. Indeed, increasingly,  the decision where to locate production facilities of any kind becomes crucial for  development, because the decision where to locate becomes a decision where to  invest and from where to trade. And it becomes an FDI decision if the location  chosen is abroad.

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