Transnational Corporation
(TNC)—Definitions
A “firm that owns and controls production facilities in two or more countries”
“A transnational corporation is any enterprise that undertakes foreign direct investment, owns or controls income gathering assets in more than one country, produces goods or services outside its country of origin, or engages in international production” This chart shows the relative growth of FDI compared to international trade and GDP growth.
The sharp downturn in the late 1990s is due, in large part, to the Asian financial crisis of 1997.

Lenovo to Acquire IBM Personal Computing
Division Creating New Leading PC Business with
Global Market Reach
- Creates world's third-largest PC business with approximately
US$12 billion annual revenue for 2003
- Global business with worldwide reach, powerful brand name, balanced product offerings and leading R&D capabilities
- Long-term strategic alliances between Lenovo and IBM in PC sales, service and financing worldwide
- Worldwide headquarters in New York; principal operations in
Beijing and Raleigh, North Carolina
- Transaction of US$1.25 billion in cash, equity; total transaction consideration of approximately US$1.75 billion
- IBM to take 18.9 percent equity stake in Lenovo; transaction expected to be completed in second quarter 2005
Lenovo Group Limited, the leading Personal Computer brand in China and across Asia, and IBM today announced a definitive agreement under which Lenovo will acquire IBM's Personal Computing Division to form the world's third-largest PC business, bringing IBM's leading enterprise-class PC technologies to the consumer market and giving
Lenovo global market reach beyond China and Asia.
Lenovo will have combined annual PC revenue of approximately US$12 billion and volume of 11.9 million units, based on 2003 business results - a fourfold increase in Lenovo's current PC business. Lenovo's new PC business will benefit from a powerful worldwide distribution and sales network covering 160 countries, global brand recognition through the combination of IBM's highly regarded "Think" brand notebook franchise and Lenovo's leading brand recognition in China, enhanced service and support for consumers and enterprise clients, and consumer strength and market leadership in China, the world's fastest growing IT market. STORY ON A RECENT CASE OF FDI—A CHINESEOWNED FIRM PURCHASING AN AMERICAN COMPANY.

DECLINING COST OF TRANSPORT AND COMMUNICATIONS
(1990 US$)

Year

1920
1930
1940
1950
1960
1970
1980
1990
2005

Sea Freight

95
60
63
34
27
27
24
29
N/A

Air Transport
(average
revenue per passenger mile)

Telephone
Call (3 minutes, NY/London)

-0.68
0.46
0.30
0.24
0.16
0.10
0.11
N/A

Source: IMF 1997a. Cited in Human Development Report 1999.

-245
189
53
46
32
5
3
0.15

Computer
(index
1990=100)

----12,500
1,947
362
100
N/A

Problem Issues Between TNCs and Host Governments
National Sovereignty
Host country values and traditions
Social and economic development objectives
National laws and standards
Governmental affairs
Environmental standards
Employment
Human rights and equality of opportunity and treatment
Wage levels and employee benefits
Working conditions
Training and promotion opportunities
Industrial relations
Industrial democracy
Technology
Technology transfer
Research and development
Trade-marks and patents
Competition and Trade
Impact on local markets
Business practices
Consumer protection
Domestic-export sales ratio
Fiscal Policies
Impact on balance of payments
Transfer pricing
Repatriation of capital
Taxation
Financial reporting
General
Corporate-state consultation and negotiation
Corporate disclosure and accountability
Corporate responsibility

SOURCE: HEDLEY

TRANSFER PRICING is the setting of prices in transactions that are not at ‘arm’s length’—for example, when one company sells goods to another company, but both companies have common ownership. There are several ways to determine the transfer price, including cost methods, market price methods, negotiation or even simply using an arbitrary figure. A goal of transfer pricing may be to maximize after-tax revenue by setting transfer prices that reduce the total tax paid.
EXAMPLES
Example
A multinational company in country A produces shoes for $50. They sell the shoes to another part of the corporation in country B for $150, which is the transfer price. They are then retailed for $350 in country B. Gross profit to the corporation is $300 ($350 – $50): $100 of the profit ($150 – $50) is earned in country A, and $200 ($350 – $150) is earned in country B.
Assuming tax rates are 20% in country A, and 50% in country B, the taxes paid by the corporation are $20 ($100 * 20%) in country A and $100 ($200 *
50%) in country B for a total tax liability of $120. The profit after-tax is $180
($300 - $120).
If the multinational corporation changes the transfer price from country A to country B from $150 to $300, the gross profit remains the same at $300.
But, profit in country A is now $250 ($300 – $50) and in country B $50
($350 – $300). Taxes paid in country A are $50 ($250 * 20%), and in country
B are $25 ($50 * 50%) for a total tax liability of $75. The after-tax profit has now increased to $225 ($300 – $75), although production costs have not changed. Given this scenario, a country with laws governing transfer pricing may require the company to adjust prices in order to ensure a fair division of their taxable profits and prevent them from reducing taxable profits by artificial price management.
Source: http://canadianeconomy.gc.ca/english/economy/transferpricing.html

Sovereignty
Basic definition: The supreme and independent power or authority in government as possessed or claimed by a state or community.
Historically, the sovereignty and, therefore, the power of a state lay in its ability to achieve compliance to whatever it commanded within a territorially defined space. Border lines physically defined what was territorially sovereign and what was not. If a state’s sovereignty was challenged from outside its territory, it could resort to force to maintain control.
Source: Hedley

Three developments that underlie the transnational corporate “threat” to state sovereignty:
• Permeability of borders
• Mobility across borders
• Border straddling
Key point: These developments have made national borders increasingly irrelevant to TNCs. TNCs do business where ever they please; where ever it makes the most sense (or the most
CENT$)

Cross Border Flexibility and
Between-Border Variability
TNCs have gained Cross Border
Flexibility
States (and other actors), however, remain relatively immobile. Moreover, among states, there is a great deal of variation in terms of laws, environmental and safety regulations, tax rates, labor relations, and so on. In other words, in the world of nation-states, between-border variability is still the rule.
The Main Point: Cross Border Flexibility allows TNCs to take advantage of betweenborder variability