In today’s world rapidly turning into a global village, integration and internalization are the talk of the town. The homogeneity of consumption and international production are common clichés discussed not only among economists, but general public as well. And in this respect numerous questions concerning the pioneers of this movement, i.e. transnational corporations (TNC or MNC) arise. With more than 70% of international trade carried out by TNC the latter have become the real market players influencing all aspects of global economy, starting from exports and labor market and finishing with knowledge exchange or integration process.

The dynamics of the TNCs are no less impressive. By the early 1990s there were around 37,000 TNCs with over 206,000 affiliates(1) (subsidiaries, branches, etc) in foreign countries, ten years after, in 2006, their number surpasses 78,000 and 777,000 respectively. The same year boasted 172 cross – border M&A deals over USD $1 billion, and more than $1,300 billion of FDI. According to the UNCTAD World Investment Report, more than two thirds of the global number of R&D projects were financed directly or indirectly by TNC.

This phenomenon is being closely watched by economic science and various theories concerning the nature, strategy and functioning of TNC have appeared since the beginning of a new period of great companies international presence in the 1960s. This subject was also discussed during the conference on theories of transnational corporations and their activities celebrated on April 28th, this year, at the Faculty of Economics and Business Sciences of the UCM, Madrid. That day the students and academics of the university welcomed Grazia Ietto-Gillies, professor of Applied Economics and Director of the Centre for International Business Studies of London South Bank University, the renowned researcher in her field.

This conference together with many others forms part of an educational project carried out by the Faculty in association with the Centre of International Studies UCM and is aimed at inviting the most distinguished scientists and prominent figures of modern economics to share their knowledge and experience with Spanish scholars.

Headlighting the main aspects of numerous theories of TNC retrospectively, professor  Ietto-Gillies focused on historical context which contributed to their creation as well as the continuity of academic thought from the original works of  S. Hymer till the most recent concepts of Networks theory. The key elements of the Internalization theory, Dunning’s eclectic paradigm, oligopolies’ behavior concept, evolutionary approach to the activities developed by TNC and New Trade theory were covered among others.

The initial question made by Stephen Hymer back in 1960 (How can a foreign company compete successfully in an unfamiliar market, where is must be at a disadvantage compared to local firms?) lead him to reassessing the conventional neoclassical theories of international investment based on interest rate differentials between the countries. Hymer was the first to establish the concept of FDI and portfolio investment connecting both with the idea of control and company’s search for enhancing its market power. One of the most astounding things about Hymer’s thesis is that on the one hand, it passed almost completely unnoticed in the time of its publication, and reemerged several years after his premature death bringing its author posthumous fame. On the other hand, this work in concise form contains the germs of the majority of theories and concepts that appeared in the field decades later. For example, his idea of a company’s owning specific advantages, either of innovatory, cost, financial or marketing kind, and applying these advantages to gain larger market share or better control was then revised and developed to fit the new era and technology market (2).

The theory of TNC received further development with R.Vernon’s concept of product life-circle and innovation competitive edge that characterizes multinational companies. Focusing on the product-side rather than a company-side, Vernon also managed to apply various micro- and microeconomical theories (like Posner’s technological gap theory of trade or Kuznetz’s idea of long-term technological circles and global production shifts) to explain FDI phenomenon.

Later on, under neo-institutional influence and developing R.Coase’s theory of a firm, the concept of internalization emerged which reasoned the idea of transaction costs cutting and facing market imperfections by establishing wider internal infrastructure. This theory did explain the rapid growth of TNC and their subsidiaries in the 1970s and 1980s but stumbles trying to account for the recent trend of outsourcing which is gaining pace. Why more and more global producers prefer going off-shore?

In search of the answer and being fostered by innovation boom of the end of the century Evolutionary theory and Networks studies appear. The former makes emphasis on efficiency of knowledge transfer within the framework of a firm trying to protect its ownership advantage against rivals, the latter concentrates upon cluster analysis, M. Porter’s concepts of intra-corporate relations as well as relations between a company and local agents in a host country (3). This is of special importance nowadays as the general concern about the consequences of TNC operations in developing markets has started to influence governmental policy in respect to global corporations. Distribution of revenues is a cornerstone issue and the newest theories permit to analyze environmental protection activities or corporate charity programmes (like McDonald´s summer courses for physically challenged children or BP´s Humanitarian Aid to Indonesia (4)) as part of a social infrastructure net TNC are operating in.  

Perhaps the most analytical and synthetic approach was demonstrated by J. Dunning in his famous OLI (ownership, internalization, location advantages) paradigm (the 1970s) which unites many of his predecessors’ arguments in a dynamic system showing the process of company’s growth related to taking decisions to export, franchise or expand abroad at different stages. The strength and weakness of OLI rests in its integrity: as it covers almost all possible advantages a company can enjoy due to its transnational status, the eclectic paradigm may be applicable in all theoretical cases, but the same breadth of approach impedes making valuable practical use of it. 

As we see, the historical perspective of the academic thought on transnational corporations is closely connected with the situation on the international goods and capital markets of these days and applies the variety of adjacent theories and techniques from marketing, micro and macroeconomics, financial analysis to account for TNC boosting activities. Theoretical framework allows us to understand the changing nature of global corporations which take advantage of the shifts of international markets and by managing the capital and technological resources accumulated within years gain efficiency.

___________________________________

(1) Here and further: the numbers given come from World Investment Report 2007, UNCTAD, http://www.unctad.org/

(2) Foreign Direct Investment Theory. Presentation by Ivar Bredesen, Oslo University College from home.hio.no/~ivar-br/fag/intecon/FDI%20Krakow%202.ppt 

(3) Knowledge of the firm and the evolutionary theory of the multinational corporation. Bruce Kogut, Udo Zander. Journal of International Business Studies, 4th quarter of 1993.
Available at  www.aib.msu.edu/awards/24_4_93_625.pdf

(4) www.bp.com/sectiongenericarticle.do?categoryId=9015669&contentId=7028935