Report on Transnational Companies

MESM Semester 3

September 19, 2011

Business Leadership Assignment The Evolution of Transnational Companies in the Globalization Era

Anvesh Lanka Bakul Sanakal Fenella Andrade Mallesh Goudar Vinay Darbi

Report on Transnational Companies

MESM Semester 3

Globalization and International Trade [1] According to Kenichi Ohmae, the Japanese management guru, Globalization is an international business orientation based on the concept of the borderless world which states that the world is becoming more homogenous and that the distinctions between national markets are becoming less relevant. Factors resulting in globalization Development of the Economic Transnationalism Ideology [Trade beyond Borders] Lowering of Trade and Investment Barriers through GATT & WTO guidelines Economic Transformation through Privatization Economic Privatization Eg: Liberalization in India in 1991 Political Privatization Eg: Thatcherism in Great Britain Development of IT in the fields of e-Commerce, Finance & Banking and Networking Innovation and Improvement in Transportation & Communications

These factors raise implications for global trade that must be identified and addressed. As a result, business entities are required to organize their hierarchical structure in a way that is most beneficial to their global outlook. This has led to the development of different types of global organizations, which will be discussed in the next part of this report. The five interrelated stages of the globalization process

Report on Transnational Companies

MESM Semester 3

1. Exporting products and services using the distributions systems of the host country 2. Exporting and setting up a distribution system in the host country 3. Manufacturing and distributing in the host country, while retaining all ties with the headquarters and acting as a subsidiary 4. Insiderization, the process of becoming like any other manufacturing concern located in the host country 5. Development of a fully globalized company that operates in multiple countries, and whose origins are no longer clear Different types of Global Organizations: Criteria for Transnational Companies [2] Michael Porter defined global companies as firms whose competitive position in one country is significantly influenced by their position in other countries. In order to deal with this effectively, these firms would have to integrate and coordinate activities on a world-wide basis. The transnational framework, defined by Bartlett and Ghoshal, offers the best solution for bringing this into effect.

Type of Enterprise Strategy Global Multinational International Transnational

Key Competitive Issues Efficiency Responsiveness Learning Efficiency, Responsiveness and Learning

Global Enterprises locate their headquarters in one country and perform their operations in one or other countries, in order to broaden their markets. The organization functions in a centralized manner. The key effectiveness criterion for such

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MESM Semester 3

companies is efficiency, and this is brought about through economies of scale. Japanese companies like Honda and Nissan have used this approach to get into the American market. Multinational Enterprises try to decentralize their operations in order to increase their sensitivity to the individual countries that they operate in. The national/regional operations are relatively autonomous and work towards achieving responsiveness to local markets. Companies like Honeywell and General Foods are known to have used this strategy for their regional subsidiaries. International Enterprises use a horizontal decentralized structure and establish strategic linkages with branches in different geographic locations. They compete with other international companies on a world-wide basis. Their success largely depends on the ability to transfer knowledge within their overseas network and therefore, learning is the key effectiveness criterion. General Electric and Procter & Gamble are known for using this strategy.

Organizations will be most effective when they simultaneously meet the challenges of global efficiency, local responsiveness and learning. This calls for a transnational strategy wherein each organizational activity will be performed at a location where it can be best performed. Transnational organizations have to be responsive to the nature of the emerging markets around the globe. They have to achieve efficiency by locating themselves around strategic centers of excellence, which provide economies of scale, and the best intellectual and capital resources. The different geographic units must coordinate themselves in a way that allows for the realization of global corporate objectives and must ensure that they create facilities for knowledge transfer as a when required.

Report on Transnational Companies

MESM Semester 3

Any organization that has Foreign Direct Investments [10%-25%] in a multitude of countries, and adheres to such criteria can be classified as a Transnational Company [TNC]. Hewlett Packards subsidiary company VeriFone is known to be a staunch supporter of this strategy. Unilever is perhaps the most suitable example for transnational companies.

Foreign Direct Investment The most acceptable definition of FDI suggests that it is a mutually beneficial process involving the transfer of capital, technology and entrepreneurial ideas from TNCs to local factors in the host country. It is a part of the criteria used for the identification of Transnational Companies. The largest source of external funds for developing countries is Foreign Direct Investment. It is considered by some to be a vehicle for economic development, while others view it as a means of extending markets. Some even consider it as a mechanism to control the economic decisions of nation states. [3]

General Perceptions about FDI [6] It is a less volatile capital inflow mechanism that strengthens host country economies through the development of export competitiveness and import capabilities.

Report on Transnational Companies

MESM Semester 3

FDIs are different from others types of capital inflow in that they provide the missing links to host economies in the form of skills, training and technology, capital goods and intermediate inputs. But the growth resulting from this phenomenon is temporary and will stagnate if the host country does not work towards building a stable base for the development of local capabilities. The host educational environment requires adequate attention.

TNCs use foreign direct investments to develop local supplier capabilities in terms of technical standards and quality levels. Through this, they create regional centers of strategic excellence.

FDI helps in improving the productivity of indigenous suppliers. This can however limit local production to low-value activities and intermediate goods.

FDI adds to the quantity of employment in the host country. But TNC growth may result in losses and layoffs in domestic competitor companies. Even when TNCs use mergers and acquisitions, workforce reduction is a common phenomenon.

FDI inflows can supplement domestic financial investment. TNCs can help undertake investments that are normally beyond the scope of individual domestic investors.

It is important to note that foreign direct investment is not always a boon to the host country. The needs and requirements of the TNC might be different from those of the host countries. In such situations, competitive TNC-Host practices result in negative effects. Most of these perceptions have limited empirical base, except for a few studies which validated a positive correlation between FDI and GDP growth in developing countries.

Report on Transnational Companies

MESM Semester 3

Strategies for Transnational Companies [2, 3 & 4]

Adoption of Virtual Organizational Design for Connectivity Development of Company Protocols that facilitate Global Knowledge Transfer Horizontal Decentralization of the companys Hierarchical Structure Creation of Transnational Teams Mass Customization Synergy through Global Research and Development Global Sourcing and Logistics Global Intelligence and Information Resources Global Alliances Global Customer Service Emerging Market Models/Strategies Transnational companies worldwide are now trying to increase their presence in emerging markets, as a result of saturation within their existing markets. They should adopt cross-cultural business strategies that allow them to tap into these markets effectively, by balancing the trade-offs between local responsiveness and global integration requirements.

Development of IT infrastructure Electronic Data Interchange Interorganizational Systems Electronic Commerce using Internet Organizational Memory Systems Mass Customization Technology

Report on Transnational Companies

MESM Semester 3

Extranet, Intranet and Internet Groupware Language Translation Software

The Dynamics of Economic Transnationalism

[2 & 3]

The Host Country Perspective

Benefits Increase in the Product Range available in the host territory Economic Assistance to National Systems Development of National Infrastructure Development of the Private Sector, a necessary component of any countrys economic system Generation of Employment Increased Production Efficiency Technology Transfer Development of human capital Long Term Economic Stability A number of macroeconomic benefits accrue as a result of economic transnationalism Export-Import transactions, Balance of Payments, Development of the banking system, etc. Better Domestic Product Quality The quality of products offered by transnational companies result in a shift in the competition dynamics of the

Report on Transnational Companies

MESM Semester 3

domestic market, thereby forcing the local manufacturers to improve the quality of their products.

Risks Overdependence of nation states on TNCs Exploitation by TNCs

The TNC Perspective

Benefits Market Expansion Proximity to Consumption Zones Mobility and decrease in Boundary Control Resource Tapping Wage Rate Differences Increase in Human Capital available to the company Economies of Scale Economies of Scope

Risks Nationalization Restrictive Practices of host countries

Report on Transnational Companies

MESM Semester 3

Differences in the legal systems IPR Violations

TNCs in Politics [3, 5, 6, 7 and 8] As a result of globalization and resultant dependencies, we now have a situation where the activities of transnational companies go beyond the sphere of national legal systems. But there is no centralized government institution that can create a global framework of rules for transnational trade. Even the UN and other international economic organizations act mostly through guidance mechanisms. TNCs and civil society organizations increasingly participate in the formulation and implementation of rules in policy areas that were previously only government related. Manipulation of political systems to avail import duty benefits, tax exemptions and subsidies. Funding political parties in host countries to avail local protection and competitive benefits. Controlling mass-media operations to gain a hold over the host political system. Lobbying against restrictive trade practices and binding regulations, through their role in international bilateralism.

Criticism of Economic Transnationalism [3]

Report on Transnational Companies

MESM Semester 3

While economic transnationalism is considered to be stable in developed countries, its role in the developing countries requires careful interpretation. TNCs wield a high degree of control on the economic and political systems of vulnerable less-developed nations. Their profit-driven culture might result in exploitation.

The Crowding Out phenomenon Transnational Companies have a vast source of resources and knowledge, and are therefore at a considerable advantage when compared to small domestic manufacturers. This uneven competition might result in the creation of TNC oligopolies with the gradual shutdown of domestic enterprises.

Environmental Despoilment Many TNCs are involved in self-governance processes through concepts like Corporate Social Responsibility, Corporate Sustainability, Corporate Philanthropy, Business Ethics etc. This approach is now under criticism. It is perceived as a means to ensure lower levels of regulation and monitoring in the international arena.

Transnationalism as an Offshoot of Colonialism: Historical Basis for Criticism [5] The British East India Company is a good example for the evolution of TNCs as political entities. Colonization was initially a purely economic endeavor with trade as its core objective. However, the conditions prevalent in the colonial period allowed European corporations to engage in business warfare without affecting the concepts of national frontiers within the European homeland. As a result, they started influencing the

Report on Transnational Companies

MESM Semester 3

political dynamics of the both the colonizing and the colonized nations. The distinction between their roles as trading corporations and political actors became unclear due to their policies towards the indigenous people. Except in a few cases, there were no property rights for the colonized. The concepts of sovereignty for the colonized were non-existent, and it was considered to be the colonizers domain. The economy and polity of the host countries were subject to the conditions prescribed by the colonizing nations. But the Second World War resulted in major changes in the global economic order. The concepts of sovereignty and ownership, that enabled the colonial powers to create a political dominion in the colonized world, no longer remain the same. As a result, Colonialism has evolved into what we refer to today, as Transnationalism. It is sometimes referred to as a process of Neocolonialism. TNCs lobby extensively within the political system in order to control trade cooperation between corporations and nation states. However, their role in the political sphere is not as evident as before. In the present scenario, the public nature of such organizations allows them to gain benefits over individuals, and their private nature allows them to counter/resist the demands of the nation state they operate in. The organizations and treaties that govern global trade are usually dominated by the erstwhile colonial powers, and the new age nations have a very limited role in the ratification of most of these agreements. Multilateralism, development aid and privatization are now being used by political powers to enable their own corporations to get past national restrictions on foreign trade. As a result, TNCs evolve continuously as the colonial corporations did, and develop into political entities. Whether or not this is an acceptable phenomenon is a highly debatable question, and it is often the crux of protectionist political ideologies. This example was given only to reflect upon the ideas

Report on Transnational Companies

MESM Semester 3

that result in criticism of the TNC model and the political dynamics of transnational trade.

Regulation of TNCs [7] A number of NGOs and CSOs worldwide are now actively involved in the act of creating transparency in TNC Operations. It has been firmly established that there is a need for international organizations that lay guidelines for ethicality and moral business behavior in international business endeavors. As a result of this, the UN Economic and Social

Council has set up two permanent bodies, the ICTC [Intergovernmental Commission on Transnational Companies] and the UNCTC [United Nations Center on Transnational Companies] to establish such guidelines. Additionally, the previous UN General Secretary, Mr. Kofi Annan was responsible for initiating a CSR oriented transnational program named Global Compact, which is working towards the creation of a favorable environment for multilateral trade.

The Global Compact Program The global compact program is a decentralized learning network endorsed by the UN. It comprises of private corporations, trade unions, stock exchange organizations, NGOs, CSOs and UN Agencies, whose membership depends on adherence to a set of global consensus principles that address issues pertaining to human rights, labor standards, environmental practices and corruption. Its primary objective is to promote businesssociety symbiosis through guidance on sustainable and inclusive growth. It works through policy dialogues and partnership projects, and has been successful in terms of its reputation and the perceived increase in international participation. Recent trends

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MESM Semester 3

include accelerated policy change and a shift towards development orientation, and increased participation of developing countries, However, it remains a monitoring mechanism with no real authority. It has no sanctioning mechanisms to enforce CSR and lacks the necessary governance structure to verify policy adherence. Over the past few years, the program has been criticized heavily for its lack of real power. Also, popular opinion suggests that the standards listed out by the program are minimal and serve no purpose as they are already a part of national legal systems. It is suggested that global compact membership is being misused by dishonest companies for the blue-washing effect [UN Credibility], in order to enhance their reputation without really adhering to any of the global consensus principles. It is also criticized for its costly and time-taking reporting requirements.

Conclusion & Recommendations

The presence of transnational corporations benefits the society at large, especially in countries that have a stable economic and political system. TNCs now account for a large proportion of the foreign trade conducted by many countries. They are one of the channels through which economic change spreads across the world. [7] But it is also clear that there are certain negative aspects to the transnational model which threaten the independence and sovereignty of nation states. There is a need for a balancing mechanism that will propagate free trade without compromising either host countries or TNCs. International programs like the global compact must include sanctioning mechanisms in their operations. The TNCs and host governments should

Report on Transnational Companies

MESM Semester 3

work towards creating a system of transparency through which global trade can be beneficial to all the involved parties.

TNCs: Dealing with Criticism [2, 3 & 5] The only way for TNCs to deal with this criticism is to work towards inculcating the concepts of Symbiotic Transnationalism within their organizational culture. This could be difficult process as the benefits can only be realized in the long term, and that goes against the profit oriented culture of any business entity. In spite of this, TNCs must do their best in their efforts to evolve this way, as it will not only remove restrictive barriers and enable free trade, but it will also provide for the development of a truly facilitative scenario for global business.

Concepts of Symbiotic Transnationalism Corporate Social Responsibility Prevention of Exploitation Moral Capitalism Balancing Profit Concerns with Ethical Concepts Environmentalism Environment-friendly Initiatives Sustainable Development Optimal Resource Usage and shift to Eco-friendly Fuels

TNCs must try to develop their competitive advantage through local responsiveness, efficiency-oriented operations and global learning rather than backhand political moves. They should work towards government policy harmonization across the globe without getting into the political setup in an exploitative manner. Also, the host country government must develop indigenous capabilities and governance mechanisms to

Report on Transnational Companies

MESM Semester 3

ensure that it is not exploited by transnational companies. While the political system should not be excessively restrictive, it should develop a framework that governs TNC activities and enables TNCs to operate without issues. The new international growth paradigm is based on the development of human capital and infrastructure across the world. It is only through the creation and development of markets that both TNCs and host countries can deal with the reality of globalization. Therefore, an integrated and symbiotic approach is required to reap the benefits of transnationalism in the modern world.

References

1. A primer on the important legal aspects of the international business environment; Richard J Hunter et al; Journal of Money, Investment and Banking, Issue 2, 2008, pp. 5-15

Report on Transnational Companies

MESM Semester 3

2. Going Global: Using IT to advance the competitiveness of the Virtual Transnational organization; Marie-Claude Boudreau et al; Academy of

Management Executive, Vol. 12, No. 4, November 1998, pp.120-128 3. Perspectives on Transnational Companies: FDI; CSIDS; Paper No. 040714 4. Multinational Corporations and the global economy; Romeo Ionescu et al; Dunnarea de Jus University Papers 5. The transnational corporation in history: Lessons for today?; Janet McLean; The George P Smith II Distinguished Visiting Professor Lecture, April 2003 6. The role of TNCs in the economic development of developing countries; Mohsen Salmeh et al; Iran Khodro Diesel Company - Engineering Papers 7. The role of the TNC in the process of Legalization: Insights from Economics and CSR; Andreas Georg Scherer et al; Law and Legalization in Transnational relations Oxford: Routledge 2007; Dirk Lehmkuhl [Eds.]; pp. 202-225 8. The role of multinational corporations in developing countries; Hussian H Zaidi; Business and Finance Review