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Notes on Transnational Corporations
             and the U.N.U.'s Course on Transnational Corporations
              -by Róbinson Rojas - 1996
  - Definitions
  - 20 complaints about TNCs
        BOX 1 High Technology.-How Europe can fight the multinationals
        BOX 2 The use of capital intensive-technologies
        BOX 3 Transfer pricing and expensive technology
        BOX 4 Effects on balance of payments
        BOX 5 U.S. trade and U.S. TNCs
  - U. N. University: The course on transnational corporations:
                               STUDIES ON TRANSNATIONAL CORPORATIONS


  The first and most important notion about TNCs is that they
dominate the economy of their home countries, and the world
trade. Apart from the latter, they dominate most of the
economies in less developed societies where they invest. Because
of the above, their economic and political power is enormous,
and because they are the most refined expression of the capitalist
system, they are engines not only creating economic growth, but
also social and economic exclusion, wealth and poverty, and
political systems which are less and less democratic.

  The second notion about TNCs is that their home countries are
concentrated in the United States, Japan, United Kingdom, Germany
and France. Because of the above, they impose the so-called
"Western European-American way of life" on a variety of cultures
in Latin America, Africa and Asia, creating a situation of
cultutal imperialism, added to the economic and political ones.

  The third notion about TNCs is that because they are so
important in the political, cultural and economic life of the
human race, it is necessary to study them scientifically. There
is no possibility of studying development without a sound
understanding of how TNCs organize world production of good and
services, flow of capital, knowledge and cultural habits. Therefore,
the last section on this paper ( and items 14 to 30 in DEVELOPMENT)
present a set of notes about a course on TNCs, mainly based on the
University Curriculum on Transnational Corporations, United Nations,
1992, but amended where it was necessary by Róbinson Rojas.

  I do recommend reading World Investment Report 1996 
and  O. Sunkel, The international corporate system.


    [ necessary definitions: a transnational corporation ( or 
multinational corporation ) is defined in RROJAS RESEARCH UNIT as
a group of corporations that is operating in different countries but
is controlled by its headquarters in a given country. Transnational
corporations participate in international business -international
business can be defined as those business transactions among 
individuals, firms, or other entities {both private and public} that
occur across national boundaries- through channels of entry including
exporting, licensing, franchising, TNC-owned foreign enterprises 
(joint ventures and wholly owned subsidiaries), management contracts,
and turnkey operations.
    A TNC can manufacture products in a foreign country by signing a
licensing agreement with an independent foreign firm that obtains the
right to produce and sell the product in return for a modest fee.
Franchising involves granting permission to a foreign firm to produce 
a product and to use its name, trademark, or copyright, in return for
a fee and royalties (based on a contract). A TNC may have part 
ownership, which is a joint venture, or complete ownership, which is
a wholly owned subsidiary, of its foreign production and marketing
operations. In a management contract, a company provides managerial
assistance to another company in return for a fee. A turnkey 
operation is an arrangement by which a TNC agrees to construct an
entire facility or plant, prepare it for operation, and then turn
the key over to the local owners, for a fee.
  The United States is the world's major exporter, the major investor, 
and the major recipient of foreign direct investment (FDI) (year 1995)
(see BOX 5).

     The subject of TNCs is highly controversial attracting a variety
of complaints by host countries against these big corporations. See
BOX 1 for the case of TNCs in industrialised countries. By and large,
the major criticisms, especially in connection with TNCs' activities
in less developed societies, are as follows:

1.- They raise needed capital locally, contributing to rise in 
    interest rates in their host countries. By the same token, they
    make local capital, in relative terms, even more scarce, blocking
    domestic investment from growing, or forcing domestic investments
    to be financed through loans from abroad.

2.- The majority (sometimes even 100 percent) of the stocks of a 
    TNC's subsidiary is owned by the parent company. Consequently,
    the host country's residents do not have much control over the
    operations of these corporations within their borders.

3.- They reserve the key managerial and technical positions for 
    expatriates. As a result, they do not contribute to the "learning-
    by-doing" process in host countries.

4.- They do not provide training for host countries' workers.

5.- They do not adapt their technology to the conditions that exist 
    in host countries. In less developed societies TNCs have used
    capital-intensive technologies that are inappropiate for labour-
    abundant developing economies ( see BOX 2 ) 

6.- They concentrate their research and development activities in
    their home countries. As a result, they restrict the transfer of
    modern technology and know-how to host countries.

7.- The give rise to demands for luxury goods in host countries at the
    expense of essential consumer goods.

8.- They start their foreign operations by the purchase of existing 
    firms, rather than by developing new productive facilities in host

9.- They do not contribute to host countries' exports.

10.- They worsen the income distribution of host countries.

11.- They do not observe the objectives of the host countries' 
     national plans for development.

12.- They earn excessively high profits and fees, due to their 
     monopoly power in host countries. They utilise the technique
     called "transfer pricing" (see BOX 3) to earn abnormal profits
     avoiding taxation. The above exerts a negative pressure on
     balance of payments.( see BOX 4).

13.- They dominate major industrial sectors.

14.- They are not accountable to their host nations, only to their
     home governments.

15.- They contribute to inflation by stimulating demand for scarce

16.- They recruit the best personnel and the best managers from host
     countries at the expense of local entrepreneurs. See BOX 1.

17.- They form alliances with corrupt (and non corrupt) developing 
     societies elites ( See R. Rojas, "The Murder of Allende", and
     R. Rojas, "Latin America: Blockages to Development", on this 
     databank ).

18.- They interfere with political conditions of developing host

19.- They disregard the impact of their actions on consumer safety and
     environmental conditions.

20.- They disregard the cultural and social impact of their actions
     on host countries.
(see sources at the end)

==BOX 1 ==High Technology.-How Europe can fight the multinationals===

by Michael Butler    (The Financial Times, 05/01/1986)

    I have heard respectable people argue that it does not matter if
European high technology companies are taken over one after the other
by American or Japanese multinationals. If the market so decrees let
no man intervene!
    This needs to be thought through. The multinationals are in 
Europe TO PROMOTE THEIR PARENT COMPANIES' strategy for gaining world
market share and MAXIMISING THEIR LONG-TERM PROFITS. As part of that
strategy they may do some manufacturing in Europe and even some 
MAJORITY OF THEIR PROFITS FLOW THERE. Once they have knocked out or
taken over the European competition, they are free to shift the 
balance of their investment in plant and research towards home OR TO
OTHER MARKETS YET TO BE CONQUERED. If Boeing in aircraft, or IBM in
information technology, can achieve a still more dominant world 
market share than they have now, THE TEMPTATION TO BEHAVE LIKE
MONOPOLISTS WILL BE GREAT. European industry in other fields will
    Among the reasons why European companies are loosing market share
is that there are too many European "national champions". Two 
Japanese companies spent $1.5 bn on developing digital switching
systems, three American companies $3 bn and 10 separate European
companies $10 bn. It is not the Europeans who are winning. Another
reason is that Japanese and American competitors, in different ways,
enjoy major advantages. US public purchasing rules, such as Buy 
American, favour US companies -but US Government controls on the 
outflow of technology hinder European companies.
    Vast space and defence expenditure underpin American companies'
research and investment. European governments compete with each other
in giving Japanese and American incentives to invest in the EEC in 
high technology fields which produce least jobs and are most 
dangerous for European companies.
    The European Community is already taking some essential steps,
creating a single great market by 1992 and helping small and medium-
sized enterprises.But these things, excellent in themselves, will not
solve the problem. The multinationals will be as well placed as 
anyone to prosper in the single market and only large enterprises can
find the funds for research and marketing needed to climb towards the
crucial threshold of 5 per cent of the world market.
    What then can be done? Protectionism would make Europe still more
uncompetitive. More Government money is not the answer. Pooling basic
research efforts could help but only marginally. In Eureka, 
governments are seeking out the legal and fiscal obstacles to 
European co-operation. They will find some serious ones and it would
be helpful if rapid action could be taken to remove them, presumably
through European Community legislation. For the basic idea behind
Eureka, that European companies need to co-operate in order 
to survive, is right. Action is needed this year.
    But more is required; and time is short. The British Government,
which has the chair of Eureka until June and of the Community from
July, is well-placed to give a lead. Here is a menu for early action:
* First, the British proposal for a Eurotype warrant which would open
  all public purchasing to the products of co-operation between 
  European companies, should be adopted this year.
* Second, the Community should tell the US Government that the time 
  has come for reciprocity in public purchasing.
* Third, the Community should also seek reciprocity on the transfer
  of technology. It is time to take a common position on American
* Fourth, national and Community competition rules should be 
  interpreted as applying to the world market. It makes no sense to
  prevent European companies from getting together in fields where
  the outside competition is more than strong enough to keep them on
  their toes without competing with each other.
* Fifth, Community Governments should agree to a self denying 
  ordinance not to give investment grants to non-European high 
  technology companies which would threaten European companies in
  their field.
* Sixth, all Community Governments should review their own investment
  and innovation incentives to ensure that they promote rather than
  discourage European co-operation.( The British Business Expansion
  Scheme specifically excludes it. )
    Schemes to promote European co-operation must apply to genuinely
European companies, those with their headquarters in European 
countries and of which the major part of the profits remain in Europe.
The multinationals will oppose this idea. Some have put a lot of
effort into convincing Governments that they themselves are European,
because they have subsidiaries incorporated in Europe and manufacture
there. That is an illusion and the nettle must be grasped. The US
Government knows which are American companies. We know which are
    These are things the European Community can do to make it easier
for our companies to co-operate. But in the end it is the companies
who have to do the biggest thing. They have to forget that they are
long-standing rivals and remember the danger of hanging separately if
they do not stand together. They have to make deals under which each
produces complementary products and buys them from each other. They
have to form joint venture companies to produce hardware and, indeed,
whole IT systems. They have to find ways of pooling their marketing
efforts, either for particular products or by region.
    It will not be easy. Ways of thinking must be changed in the
European Commission, in Governments, in boardrooms and in middle-
management. That usually takes a long time. We haven't got it.
Sir Michael Butler was until last year (1985) Permanent UK
Representative to the European Community.          
================================================end BOX 1=====RROJAS


=   Of course, this behaviour of TNCs is just the outcome of the    
dynamics of the capitalist system, whose main motive force is       
maximizing profits. Thus, in accordance with the main stream 
literature, this tendency to use capital-intensive technologies
can be attributed to the following factors:
A.- Engineers who design a plant for a TNC are ussually trained 
    according to an advanced country's curricula. Thus, an engineer's
    interest is in TECHNICAL EFFICIENCY, that is, to produce the
    maximum amount of output from a given amount of input. Given such
    orientation, machines are often considered more efficient than 
    humans, a capital-intensive technology is chosen.
B.- In some industries, such as chemicals, petroleum refining, and
    steel, capital-labour ratios are not alterable to a significant
    degree. Thus, capital and labour should be combined in a 
    relatively fixed proportion. As a result, there may be no 
    substitute for a highly capital-intensive technology.
C.- In many developing societies, the technical, administrative, and
    managerial resources needed to implement labour-intensive
    technology are scarce. As a result, it may be cheaper for a TNC
    to use a capital-intensive technology, conserving expensive
D.- TNCs may find that modifying their capital-intensive technology
    is more expensive than employing it without modification.
E.- The policies of some developing countries may make capital
    cheaper than its equilibrium price, that is, the price determined
    by market forces of demand and supply. The cheaper capital, in 
    turn, may encourage the use of capital-intensive technology.
    Policies that lead to factor market distortions include minimum
    wage legislation, capital subsidization, and artificially low
    foreign exchange prices. The minimum wage legislation, resulting
    from organized labour pressure, artificially raises the level of
    wages in a developing country and discourages the use of a 
    labour-intensive technology. On the other hand, capital subsidies
    and low foreign exchange prices, designed to promote 
    industrialization, encourage the use of a capital-intensive
=========================================================end BOX 2===


    Because the market for technology is highly imperfect and pricing
information is not readily available, the pricing for technology
transfer represent a complex issue (or an instance of criminal 
behaviour), which is further complicated by what is known as TRANSFER
PRICING. Transfer pricing refers to the pricing of goods and services
that pass between either a parent company and its subsidiaries or the
subsidiaries themselves. Because transfer pricing are set by the
corporate family when dealing with each other, the prices may not
reflect market prices. Often a market price for a particular good or
service may not even exist. As a result, a TNC may use transfer 
pricing to minimize taxes or to overcome foreign exchange controls 
that prohibit the repatriation of funds.
    Because tax rates are different between nations, a parent company
exporting goods and services to a subsidiary in a high-tax nation
(compared to the taxes charged in the home country) could set a high
transfer price. This has the effect of decreasing the profits of the 
foreign subsidiary and lowering taxes in the host country. In the same
manner, if the subsidiary is located in a low-tax nation, A TNC could
minimize taxes by charging  a low transfer price. However, if import 
tariffs are present, the TNC will consider both taxes and tariffs in
formulating the transfer pricing  policy because a high transfer price
means a high value for the goods and services sold. Similarly, a low
transfer price means a low value for the goods and services sold.
Because import tariffs are imposed on the declared value of imports,
this leads to a higher or lower tariff cost depending on the case, a
TNC should measure the tax benefit of a higher or lower transfer price
against the resulting higher or lower tariff cost. A high transfer 
price will be charged if the savings on the host country's taxes are
greater than the additional tariff costs. A low transfer price will 
be used if the savings on tariffs are greater than the additional
   Foreign exchange controls prevent repatriation of funds by TNCs.
To circumvent such controls, a TNC can charge high transfer prices
to its subsidiaries, thus repatriating profits from those host
countries that impose foreign exchange controls.
    Other circumstances in which a TNC may use transfer pricing to
minimize its costs occur when taxes are imposed on dividens or when
a host country's currency is rapidly depreciating. Because dividend
taxes, in essence, tax the TNC's profit twice, the firm can transfer
funds using a high transfer price instead of repatriating dividends.
If a host country's currency is rapidly depreciating, the TNC can
protect itself by adopting a high transfer pricing policy. This allows
the TNC to exchange the depreciating currency for stronger currencies,
thus minimizing the exchange losses that may result from the weaker
currency. ( See P. Asheghian, "International Economics", West
Publishing Company, USA, 1995, ch. 17 )
===============================end BOX 3=====================rrojas===

==BOX 4===EFFECTS ON BALANCE OF PAYMENTS==============================

             (Millions of dollars)                          
                                                           Share of
                         Brazil          Transnational     TNCs in
Account                   total          corporations    category(%)
    Exports               7,951                838             11
    Imports              12,635              2,999             24
    Balance              -4,684             -2,162             46

    Interest               -637                -85             13
    Profit and Dividend    -248               -125             50
    Other                -1,578                --              --
    Total                -2,463               -251             10  

Current transactions
    balance              -7,147             -2,413             34 

    Net investment          887                 45              5  
    Loans                 7,370                614              9  
    Amortization         -1,940                -63              3
    Other                   -82                --              -- 
    Total                 6,235                596             10 

Surplus or deficit         -938             -1,817            194
Source: United Nations Centre on Transnational Corporations, 
        "Transnational Corporations and International Trade: Selected
         Issues", United Nations, New York, 1985, p. 17.
Ibid., op. cit., page 33:
    TRANSFER PRICING.- On a theoretical level there are a number of 
factors which could influence the behaviour of prices in international
transactions. An important one is ownership. Transnational 
corporations may use their superior information on world markets and
possible market power to use transfer pricing practices designed to
maximize global profits or minimize the risk and uncertainty inherent
in foreign operations. The evidence from empirical studies, although
subject to substantial criticism, has generally supported the 
conclusion that transnational corporations often engage in transfer
pricing to their advantage ( Vaitsos, C., "Inter-country income
distribution and transnational enterprises", Oxford, Clarendon Press,
1974, and, United Nations Conference on Trade and Development, 
"Dominant positions of market power of transnational corporations: use
of the transfer pricing mechanism", United Nations, New York, 1978)
==================================================end BOX 4=====RROJAS

==BOX 5===U.S. TRADE AND U.S. TNCs==================================

Composition of United States trade associated with United States
     transnational corporations
  (Millions of dollars; figures in parentheses are percentages)
                                  1966             1977      Change
                            Exports Imports  Exports Imports Exp. Imp.
1.Total United States trade  29,287 25,463   117,963 146,946  303 477
2.United States manufactured
  trade [a]                  23,461 17,493    94,793  86,594  302 395
3.United States trade
  associated with trans-
  national corporations      19,186 11,708    95,764  80,930  405 603
                               (66)   (46)      (81)    (55)
  Of which:
    Trade between parent
    and majority-owned
    affiliates                6,323  5,088    29,275  30,880  363 507
                               (33)   (43)      (31)    (38)
    Trade between majority-
    owned affiliates and
    other United States
    residents                 1,359  1,212     6,539   7,120  381 487
                                (7)   (10)       (7)     (9) 
    Trade between parent and
    other foreigners         11,476  5,408    59,952  42,929  422 694

  Of which:
    Trade between parent and
    minority-owned affiliates   ...    ...     2,532   1,342   ... ...

 Not included in item 3:
    Trade between unaffiliated
    United States persons and
    minority-owned affiliates   ...    ...    (1,126) (1,433)  ... ...
Sources: Barker, B., "United States foreign trade associated with 
         United States multinational companies", SURVEY OF CURRENT
         BUSINESS, 1972,  and United States Department of Commerce
[a] Excluding all imports and exports associated with United States 
    transnational corporations whose main industry is petroleum and
    petroleum products.
=================================end BOX 5==============rrojas========

This course is based on University Curriculum on Transnational
Corporations, Volumen I, Economic Development, United Nations,
1991, ST/CTC/62. Modifications, addenda and improvement was
the responsibility of Dr. Róbinson Rojas

This is a synopsis of a lecture course on Transnational Corporations
and Economic Development...It is intended for students with a first
degree in Economics, Political Economy or Business Studies, and its
purpose is: 
           to describe, interpret and evaluate the interaction
           between  transnational corporations and the economic
           and social development of the countries in which they
           operate, both host and home countries

           as far as possible the course takes a neutral political
           stance towards both TNCs and economic systems; and
           seeks to present the main views and persuasions as
           objectively as possible (factual)

           at the same time, the course focus some of its
           attention on the political, social and cultural
           effects of the activities of TNCs both in home
           and host countries

The course is divided into six main parts:
           the first (sessions 1-3) describes and interprets the
                     growth of the modern TNC and its role in
                     the international economy
           the second (sessions 4-8) describes and evaluates
                     the main theories of international production
                     and the strategies underlying TNC behaviour
           the third (sessions 9-14) examines the way which modern
                     TNCs are organised and the structure of
                     decisions taking. Such an understanding is
                     essential to appreciate the options open to
                     TNCs in both influencing and responding to
                     the policies and programmes of government
           the fourth (sessions 15-34) examines the impact of TNCs
                     on various areas of the development process
                     chiefly from the viewpoint of the recipient
           the fifth (sessions 35-38) deals first with the reactions
                     of individual nation states towards the TNCs
                     and the policy options to them to ensure that
                     TNC behaviour is consistent with national
                     goals, and second the actions which might
                     be taken at a multilateral level
           the sixth(sessions 39-40) speculates about the future
                      of TNCs in the World Economy

The nature and scope of TNCs activity

The following should be described and understood in order to make
sense of the nature of TNCs and their relevance to the study of
economic development:

1 Definitions and terminology
   a) alternative nomenclature for and definitions of a TNC
   b) distinction among definitions based on:
      i) Foreign Direct Investment (FDI) (the threshold definition)
     ii) extent and significance of foreign production
    iii) international or transnational strategies of firms
     iv) internalisation of intermediate product markets
      v) the firm as an organiser of cross-border production and

   c) the nature of international production, i.e. value added
      undertaken by TNCs outside country of origin
      i) equity participation - foreign direct investment (see 1.2b)
     ii) non-equity TNC involvement i.e. inter-firm contractual and
         cooperative agreements (see 1.2c and b)
    iii) the issue of control; TNC hierarchies, galaxies and networks
     iv) varying practical definitions of foreign direct investment
         by different countries

   d) the ownership of TNCs; e.g. of bilateral TNCs such as Unilever,
      Royal Dutch Shell; the multinational spread of equity
      participation in TNCs

UNCTC (1978)(1983)(1988)
Frank(1980) Moran(1986) Weigel(1988)
Vernon(1971 and 1977)
Billerbeck and Yasugi(1970) Jenkins(1987)
Lall(1973) Hymer(1972,1979) Bierstecker(1978)
Newfarmer(1985) Bornschier and Chase-Dunn(1987)
    See Bibliography
    -- RRojas Research Unit/1996

Notes on transnational corporations and U.N.U.'s course on transnational corporations
--1. The growth and patterns of international production
--2. The current role of TNCs in the world economy
--3. The determinants of TNC activity
--4. Empirical testing of theories of international production
--5. Assessing the international market
--6. The impact of TNCs on development
--7. TNCs and the balance of payments
--8. TNCs and employment
--9. TNCs and the nation-state
10. TNCs and economic integration
11. TNCs in manufacturing activities
12. TNCs in the service sector
13. The spread of third world TNCs
14. Reactions to TNCs: national policies
15. Reactions to TNCs: multilateral
16. The future of TNCs
17. Bibliography

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