Transnational Corporations and Global Production

Transnational corporations (TNCs) are key players in the global economy. They control global value chains, influence states, and shape development models. The political economy of TNCs is an important part of IPE.

TNCs: Scale and Significance

TNCs dominate the global economy:

Sizes. The revenues of the largest TNCs exceed the GDP of many countries. Walmart is bigger than Belgium, Apple surpasses Portugal.

Share in the world economy:

About 1/3 of global GDP is produced by TNCs
2/3 of world trade takes place within TNCs or with their involvement
80% of foreign direct investment comes from TNCs

Concentration. The 100 largest non-financial TNCs control about $10 trillion in assets abroad. Digital giants (GAFAM) are the new leaders.

Geographic Distribution. Most of the largest TNCs come from developed countries (USA, Europe, Japan). But there is growth among emerging market TNCs (China, India, Brazil).

Theories of TNCs

Why do firms become transnational?

The Eclectic Paradigm (OLI — Dunning). TNCs arise when there is a combination of:

Ownership advantages: the firm has unique assets (technologies, brands, management)
Location advantages: there are reasons to produce abroad (markets, resources, costs)
Internalization advantages: it is more profitable to produce on one’s own than to license (protection of know-how, quality control)

Motives for FDI:

Access to markets (market-seeking)
Access to resources (resource-seeking)
Efficiency improvement (efficiency-seeking)
Access to knowledge (strategic asset-seeking)

Global Value Chains

Modern production is organized in global chains (GVC):

Fragmentation of production. A product is not produced in a single location. Components are created in different countries, assembly takes place in a third. iPhone: design in the USA, components from Japan, Korea, Germany, assembly in China.

Value chain management. Lead firms (usually from developed countries) control the chains, setting standards, prices, and conditions for suppliers.

Value added. Most of the value is created at the ends of the "smiling curve" — in R&D, design, branding, marketing (developed countries), not in manufacturing (developing countries).

Vulnerabilities. COVID-19 showed the risks of long chains. There is debate about reshoring, nearshoring, and "strategic autonomy."

TNCs and States: Bargaining for Power

The relationship between TNCs and host states is a central topic:

Obsolescing bargain (Vernon). Prior to investment, the TNC is in a strong position — the state competes for investment. After the investment (sunk costs), the balance shifts — the state can change the conditions.

Competition for investment. Countries compete by offering tax incentives, infrastructure, cheap labor.

Race to the bottom? Or regulatory competition?

TNC power:

Mobility — threat of departure
Control over technologies and markets
Lobbying and political influence
Regulatory arbitrage — using differences in regulation

State power:

Access to the market
Regulation and enforcement
Taxation (though with limitations)
Local content and technology transfer requirements

TNCs and Development

How do TNCs affect developing countries?

Positive effects:

Capital and investment
Jobs (though often low-paid)
Technology and skill transfer (spillovers)
Access to global markets
Tax revenue (with reservations)

Negative effects:

Displacement of local firms
Profit repatriation
Transfer pricing — tax avoidance
Race to the bottom in regulation
Political influence undermining democracy
Environmental problems

Conditions for benefits:

Local potential for technology absorption
Linkages with local suppliers
State regulatory capacity
Local content and technology transfer requirements

Regulation of TNCs

How to control global corporations?

Taxation. BEPS (Base Erosion and Profit Shifting) — an OECD initiative to combat avoidance. Global minimum tax (15%) — the 2021 agreement.

Labor and environmental standards. Voluntary initiatives (UN Global Compact, industry codes). Mandatory due diligence in supply chains (EU legislation).

Antimonopoly regulation. Growing attention to digital monopolies. The EU as a "regulatory superpower."

Investment agreements. Bilateral Investment Treaties (BITs) protect investors. Investor-State Dispute Settlement (ISDS) — arbitration. Critique: limitation of states' regulatory space.

Transnational corporations are a reality that must be reckoned with. The task of policy is to maximize the benefits and minimize the costs of their activities.