IGNOU : M.COM : IBO 1 : UNIT 7 : Q - 1. What is TNC ? Why firms become transnational?

 

Ans. TNC ( Transnational Corporation )

At the outset it must be made clear that very often the term 'Multinational Corporations' is used in the literature for the TNCs. There is, however, according to some, a difference between MNCs and TNCs. According to some experts, MNCs produce commodities/products for domestic consumption of the countries in which they operate. The TNCs, on the other hand, concentrate on producing products/commodities to meet the markets of third countries, This difference is not normally made while referring to either MNCs or TNCs. Therefore, in our context MNC can also be called TNC.

Transnational corporations are defined as an organization that owns productive assets in different countries, and has common strategy formulation and implementation across borders. They are engaged in international production under the common governance of their headquarters.

WHY FIRMS BECOME TRANSNATIONAL ?

The firms become transnational due to number of reasons. The major reasons are discussed below :

i) To protect themselves : The firms are exposed to the risks and uncertainties of the domestic business cycle. By setting up operations in another country, they can often diminish the negative effects of economic swings in the home country.

ii) To tap the growing world market : As a result of globalization, the rapid growth of similar goods and services are produced and distributed by TNCs on a world scale. The firms want to tap such a growing world market for goods and services.

iii) Response to increased foreign competition : The Firms become transnational in response to increased foreign competition and to protect world market shares. In order to follow the competitor's strategy, the firm sets up operations in the home countries of competitors.

iv) To reduce costs : TNCs set up operations close to the foreign customer to reduce costs. By doing so, they can eliminate transportation costs, avoid the expenses associated with having middlemen to handle the product, respond more accurately and rapidly to customer needs and take advantage of local resources.

v) To reduce tariff : The firms may overcome tariff walls by serving a foreign market from within. For example firms producing the goods within the European community can transport them to any other country in the bloc without paying tariffs.

vi) To take advantage of technological expertise : In order to take advantage of technological expertise, the firms manufacture goods directly in the foreign market. The direct involvement in foreign markets brings the company closer to increasing technological developments. They are prepared to respond by acquiring new technology. Thus, they are able to protect their international competitiveness.