Trans-nationalization – driving engine of world’s economic development

Tea kasradze Academic Doctor of Economics Associate Professor TSU

Globalization encouraged world integration processes and fastened tight economic relations between countries.

International firms are the main catalysts of the process – trans-national corporations (TNC). On the one hand, they are the result of rapidly developing international economic relations; on the other hand they are strong mechanisms influencing the economic relations.
It is doubtless that trans-nationalization is one of the leading tendencies of modern world economy. It is defined by the necessity of capital outflow from the countries with large capital to those ones with deficit. However, the countries with low capital possess such factors as land and labour, which are not used properly due to lack of capital. Therefore, trans-nationalization leads to development of world industrial processes and economic alignment. This process is advantageous both for the countries whose corporations are making direct investments (Base countries) and for the countries which are receiving investments. In addition, trans-national corporations want to secure their investments. Naturally they are trying to influence economic and political situation of the investment receiving country. This causes discontent of local entrepreneurs and even of the governments. Moreover, trans-nationalization might be considered by the base countries as the probability of weakening home country economy and taking out the capital of the country. Therefore, trans-nationalization despite its positive influence, both for recipient and base country economies, is frequently facing opposition in both countries. Coming out from this, main obstacles are developed between trans-national capital and interests of national states that are driving force of world’s economic development.
Before we discuss trans-nationalization key product and genesis of trans-national corporations and their evolution, allow me to briefly review key term of trans-nationalization – foreign investments and modern tendencies connected with them.
Foreign investments are divided into direct and portfolio investments. Direct investments allow foreign investor to control an enterprise effectively, while foreign portfolio investments in equities do not allow investor to actually control investment object.
There is no strict border between direct and portfolio investments due to periodical change of investors’ aims. What quantity of stocks should one possesses in order to consider it as a direct investment? There is no universal index for it. Sometimes even 5% of shares are enough for control, while in some cases even 15% are not enough. In some countries it is enough to have 10% of shares in order to control. In Germany and Great Britain the margin is 20%1. Investment below the margin is considered as portfolio investment. Generally, in world economy there is a tendency of decreasing margin at which investment is considered as direct.
Nowadays, there is a trend of rapid growth of portfolio investments than that of direct one. If 16-18 years ago, their volume was almost equal, now portfolio investments are three times more than direct. This indicates that international movement of capital becomes more rapid and speculative. Besides that, minimal package of necessary shares for the control of enterprise is gradually decreasing. Even the smallest package is enough for effective controlling.
International Corporation – organizational structure of major company that makes direct investments in various countries in the world. There are two types of international corporations:
1. Trans-national Corporation – head office belongs to one country, while direct investments are made in several countries in the world.
2. Multi-national Corporation – head office belongs to two and more country capitals and direct foreign investments are made in many countries in the world.
Most of international corporations are trans-national ones. Therefore trans-nationalization is connected with this type of International Corporation.
In 1974, Committee and Centre for studying TNC phenomenon has been established at UN economic and social committee. This indicated that TNC role has been recognized in world commonwealth. Afterwards, the committee entered the UN Conference for Trade and Development (UNCTAD). The research data and statistical information about TNC of UNCTAD is considered as the main official sources.
TNCs have passed several stages of development in the history.
First generation TNCs were created at the end of XIX century; mainly they were recycling cheap raw materials from former colonies.
Second generation TNCs appeared in the period between I and II World Wars. They were manufacturing military-technical products. Some of them continued functioning after World War II. They were manufacturing weaponry and arms.
Third generation TNCs appeared in the beginning of sixties of XX century. Their activity was founded on broad use of scientific-technical revolution achievements. In 60-80 years of XX century, national and foreign industries were merged in the TNCs activities.
Fourth Generation corporations were developed in eighties of XX century. Their activities took global character. Their characteristic features are:
· Global vision of the markets and world-scale competition;
· Distribution of international markets by several global TNCs;
· Coordination of braches activities by means of modern network IT systems, flexibility of entire organizational structure and adoptability. Adoption of common accounting and auditing rules.
· Integration of the branches, factories and joint enterprises into common international network of management that on its part is integrated in the network of other TNCs;
· Economical and political influencing of the countries where TNCs business is allocates.
Today we can already talk about TNCs of fifth generation that are appearing as independent players by their economical and financial strength together with states in world economy.
This tendency is encouraged by liberalization of their activities. In 2007, UNCTAD made 100 amendments in national legislation that can influence activities of TNCs. 74 amendments were making environment of recipient country more attractive and profitably for foreign investments2.
Main index of evaluating TNC activity is trans-nationalization index that is calculated as average of following relative indices: portion of foreign assets in aggregate volume; portion of sales made in foreign countries; portion of people employed in foreign branches. The higher trans-nationalization index, the greater is the role of foreign branches in TNC activity. Average index in developed countries is 22.4%, while in developing countries its amounts 21.8% and 19.6% in the countries with transition economies. At the same time, the highest trans-nationalization index between developed countries is in Belgium – 65.4%, in Hong Kong and China for developing countries – 103.7%, while for the countries with transitive economies the highest index is in Macedonia – 38.6%3. Research conducted in 2005 revealed that direct foreign investment outflow colossal growth in developing and transition countries. This index amounted $1.4 trillion in 2005, while ten years ago it amounted $335 billion. Increase was especially significant in some countries. For instance, Chinese companies purchased foreign assets in amount of $450 million in 2001. This number increased to billion dollars in 20054. At present TNCs – these are approximately 79.000 main companies with 790 thousand branches and dependant companies all over the world. Direct investments made by these companies in 2007 amounted $15 trillion, while sales made up $31 trillion that is 21% more than the rate in 2006. The number of people employed in TNCs made up 82 million in 2007. They are having increasing influence on international economic relations and on world economy. They are controlling almost half of world industrial sector, 63% of foreign trade, 4/5 of new technologies, know-how patents and licenses. TNCs control 90% of crops, coffee, corn, timber material, tobacco, iron and ore; 85% of cast iron and bauxites; 80% of tea and oil; 75% of bananas, natural rubber and crude oil.
Half of the export in USA is made by local and foreign TNCs, in Britain this index amount 80%, while in Singapore 90%5.
It is note worthy that in the beginning of 21st century direct foreign investments increased three times faster in comparison with domestic investments. However, only 6% of direct investments were made in developed countries. USA is in the first place by the attracted direct investments in the same period. It is interesting that 3/5 of direct foreign investments are made in developed countries, while rest 2/5 in developing countries, two third of which are consumed by Asian countries. At the same time in most of African countries, despite abundance of natural resources, there is insignificant amount attracted foreign capital. It should be noted that major part of whole direct foreign investments are made by merging and takeovers of companies. The value of such treaty in 2007 was $1.637 billion that is 21% more in comparison with the rate of 2000.
There is quite precisely developed tendency – the more developed the country is, the more direct foreign investments (DFI) is attracts and makes. This tendency is expressed in such indicator as relation between DFI received by country and investments made by the same country. In the table shown below are given mentioned indicators for different countries at the end of XX century:
Relativity between invested and attracted DFI of the country6
We can see from the table that USA, Great Britain, Italy and Dania coefficients are close to one (i.e. they are investing approximately same DFI as receiving). Indices of Germany and France are 1.5% averagely; the index for Spain is only 0.36%, while the recordsman is Japan with the index of 16.86%. TNCs development has direct influence on world economy growth. Several directions of TNCs influence on world economy can be identified:
1. TNCs mainly define competitiveness of goods and service market, its dynamics and structure;
2. TNCs control international movement of capital and direct foreign investments. They are main investors for developing countries and actively influence their economic development. At the same time they have broad fields of influence in developed countries also;
3. TNCs are playing major role in passing knowledge and technologies. Due to financial and industrial abilities scientific industry is accumulated in their hands.
4. TNCs represent stimulators of labour’s international migration. They encourage spread of professional knowledge and experience between various countries.
TNCs represent driving force of modern world economy. They have positive influence on economies of different countries and regions. They are playing significant role in the process of international competition. At the same time, role of TNCs cannot be assessed only in positive way. Their interests often oppose the interest of small and average businesses of national states.
Negative aspects of trans-national capital influence on national, mostly developing countries are:
1. TNCs manage to monopoly reduction of prices, they sharply compete with local companies, and constraint them on local market and do not allow them to develop;
2. Free movement of trans-national capital endangers stability of national currencies and overall national security of developing countries.
3. TNCs reach fields of national security and have negative influence on their development;
4. TNCs often perpetrate legislation of those countries where they are function. They frequently manipulate by transfer prices, avoid national legislation, do not pay taxes on income and pump money from one country to another.
5. cosmopolitism of trans-national capital can propagate anti national business development ideology;
6. While defending own interests, trans-national capital has significant political influence on the capital recipient country and that interests often does not coincide with the national interests of the last.
In case if interests of trans-national capital coincide with national interests of the state, it can ensure significant prevalence of the last in competition with the other countries. Therefore, developed countries actively support development of own TNCs that on their part ensure growth of tax income from international activities and increase home country’s economic and political influence.
These states carry out various measures for support of trans-national capital:
1. State ensures warranties and insurance for direct investments;
2. Supports investments dispute regulation by establishing specialised international court of arbitration;
3. Creates fair and non-discriminative investment environment both for local and foreign investors;
4. Excludes double taxation;
5. They support own TNCs on administrative and diplomatic levels in order to get influence on foreign new markets. Struggle for markets at the modern stage, has moved from military-political violence to bloodless, economic field.
It is noteworthy that sometimes states have to take measures against their own TNCs; for instance, establishing tax on outflow of direct investments. Strengthening of TNCs is accompanied by outflow of capital from the country as direct investments. This could be profitable for the country, but in has negative influence on the dynamics of employment, labour productivity and increase of production pace. Eventually all the mentioned have negative affect on GDP volume.
Developed countries understand significance of TNCs in modern world and they try to control them. As a result state TNCs appeared. At present, there are quite numerous groups of TNCs with the state participation. Amongst 500 major TNCs 8.2% are state TCNs. Tight connection with the state is characteristic for European TNCs, with French TNCs in the head7.
We have overviewed trans-nationalization – the process of transferring part of the production from one country to another by means of direct foreign investments. This is done in order to strengthen economic efficiency and stability of activities by means of TNCs. The main motive is to increase profit, conquer new markets and use economic and institutional features of recipient country.
Trans-nationalization process was active at the end of XX century and beginning of XXI century. However, recently developed global financial crisis had negative affect on the desire of the companies to invest in foreign countries. This is also caused by increased interest rates of credits. As a result merging and takeovers were significantly decreased. In the first half of 2008 the value of treaties reduced by 29% in comparison with the same indicator of 2007. Direct foreign investments in 2008 decreased by 10% in comparison with 2007 and made up $1600 trillion. Current world economic slump and financial crisis do not allow us to make positive prognosis in the broadening of TNCs activities and increase of foreign investments.