Transnational Corporations and Transnational Governance

The Cost of Crossing borders in the Global Economy

S. Lundan

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137467676
• eBook ISBN: 9781137467690
• Topic: Business
• Subtopic: Business General
• Index: Business

Transnational Corporations and Transnational Governance examines the different kinds of distance-related barriers related to cross-border investment. Different forms of governance, whether inside the firm or as part of its network of external relationships, have the aim of reducing uncertainty and creating a more predictable environment.

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The Costs of Crossing Borders in the Global Economy1

Sarianna Lundan

Introduction

‘“Transnationalism” is a term which suffers from being “in” in social science’ (Huntington, 1973, p. 334). Although this opening quote is from 40 years ago, it could just as well have appeared in a publication this year. It was written in the aftermath of a global energy crisis, when there was a need to redefine the role of some of the key actors and their relative position in the global (political) system. Transnationalism continues to be popular in the social sciences, at least in part because four decades of globalization have resulted in a world economy that presents a mixture of public and private governance, where new actors continue to emerge, but where state borders still matter. In this context, transnational organizations and transnational corporations (TNCs), in particular, continue to exert a powerful influence on the world economy, but the world economy they are operating in is in some important ways quite different from the economy that was shaping up in the 1970s.

By some measures, such as foreign direct investment (FDI) stock in relation to global gross domestic product (GDP), we now live in an economy that is more global than it has ever been before (Jones, 2004). The growth in cross-border trade has continued to outpace the growth in global GDP, and the growth in FDI has been even faster (UNCTAD, 2013). The development of information technology has enabled the emergence of global (and stateless) platforms for economic exchange, as well as providing opportunities for people in all (or most) parts of the world to access information from other parts of the world. The ­development of social media and the possibilities that it allows – not only for shaping individual preferences and consumption decisions but also for the development of social and political engagement – are not to be underestimated. Emblematic of the global economy are giant TNCs which control subsidiaries and employees in all parts of the world and sell their goods globally.

However, research in the field of international business has revealed that when it comes to cross-border international trade, investment or even contractual activity, in many ways the world is far less global than one might expect (Rugman, 2001; Ghemawat, 2003, 2007; Rugman & Verbeke, 2004). Borders continue to matter, and while Huntington argued that TNCs were primarily interested in access, which they mostly gained by negotiations with governments, we argue that TNCs today are equally concerned with acceptance or the ability to appeal to consumers (as well as governments and civil society) in foreign markets.

The contributions included in this volume highlight in different ways both the range of opportunities offered by the global economy, as well as the limitations of TNCs that prevent them from making full use of these opportunities. In particular, this volume approaches the questions of access and acceptance from a co-evolutionary perspective, where the opportunities and constraints faced by firms are not seen as purely exogenous, but are amenable to change and manipulation by the agency of TNCs (Cantwell et al., 2010). We will argue that while some conventional distance-related barriers remain important, even with advanced transportation and communication technologies, the most difficult barriers to cross are institutional, and reflect differences in norms and beliefs, as well as habituated responses to uncertainty (Dunning & Lundan, 2008a). Overcoming these barriers often calls for institutional entrepreneurship, where TNCs and their affiliates try to negotiate and shape the rules and practices that prevail in the market. The agency of TNCs in creating and moulding the rules of the marketplace across borders is central to the concept of transnationality we employ in this volume.

By using the term transnational, we wish to link our discussion to the various discourses in the other social sciences and humanities, such as those that have examined the emergence and significance of transnational networks of professionals, diaspora communities, criminal organizations or civil society groups, as well as the development of de facto transnational law (Calliess & Zumbansen, 2010; Leblang, 2010; Albanese, 2012; Abbott & Snidal, 2013; McIlroy & Croucher, 2013).

However, while TNC is the term that is used by the United Nations to refer to all kinds of transnational firms, in the international business literature transnational is a term generally reserved for a particular type of integrated transnational firm that aims to be locally responsive while achieving global scale economies. Consequently, most of the ­chapters in this volume are not written from an explicitly ‘transnational’ ­perspective, and the individual chapters use the terms transnational corporations (TNCs), multinational enterprises (MNEs) or multinational corporations (MNCs) to refer to the same entity.

The balance between things that are taken as endogenous and ­exogenous also varies between the chapters. Some of the contributors follow a tradition where the geographical patterns of TNC activity and the form of organization that it takes are mainly seen as responses to external threats and opportunities. Others see the market rules as inherently endogenous, and look specifically at the active role of TNCs in defining the content of rules such as technological standards in communication, accounting standards or farming regulations. However, all of the authors recognize the agency of firms in influencing the conditions under which they operate, and how this contributes to shaping their possibilities for access and acceptance in new markets.

The book is divided into four parts, and combines contributions from the fields of international business and management, sociology and law. This introductory chapter discusses the meaning of transnationality in relation to transnational firms, and explores the agency of TNCs in ­gaining access and acceptance in the global economy. It employs a ­co-evolutionary framework to structure the discussion in the rest of the volume, and concludes with an integrative summary of the contributions.

In the first part of the book, the chapters explore new theoretical ­perspectives for understanding the existence and management of TNCs. These include discussions on the ability of the transnational firm to resolve interdependencies across borders and the impact of the limits of human reliability and information processing ability on the management of the TNC. In the second part, the chapters explore the unique geographical footprint of TNC operations and the limits to its expansion, with a particular view on research and development activities. They also deal with the splitting of the value chain, by exploring the geographical boundaries and embeddedness of TNCs on the one hand, and the extension of its value adding activities by the use of external scale economies through outsourcing on the other.

The third part of the book deals with the organizational consequences of the transformation of global production, and the different methods used by TNCs to handle intra-firm conflict resolution in order to achieve effective coordination in geographically dispersed organizations. The final part of the book deals with the self-regulatory aspects of TNC operations particularly in relation to the social responsibility issues that arise in global value chains. These chapters examine the extension of the institutional footprint of TNCs, which takes place through participation in various multi-stakeholder initiatives, public–private partnerships and the extraterritorial governance of TNC activities, as well as more conventionally through the exercise of political power and negotiations with host countries.

International, transnational and multinational organizations

While transnational as a term is quite commonly employed in other social sciences like political science, sociology and law, in the field of international business and management it has a very definite meaning, which goes back to the seminal contribution of Bartlett and Ghoshal (1989). This was a study of American multinational firms based on a careful examination of a series of case studies in the Harvard tradition. By the mid-1980s, these firms had reached a level of internationalization not seen before, and faced the challenge of coordinating their diverse value-added activities across borders. Bartlett and Ghoshal (1989), like other writers before them, identified the essential dilemma of the multinational enterprise as the tension between global integration and local responsiveness or, in other words, the exploitation of scale economies across borders, and a simultaneous need for adaptation and customization in local markets. Their solution to managing this tension was the transnational organization, a kind of a matrix structure that (ideally) allowed the firm to pursue both objectives simultaneously.

Aside from denoting a particular organizational structure, a TNC is also the standard terminology that is used by the United Nations in its publications, including the flagship World Investment Report, which is dedicated to analysing the extent and impact of cross-border investment and other non-equity modalities, particularly in the developing world. Outside of the United Nations, most of the academic literature in business and management uses terms such as multinational enterprise or multinational corporation. These terms are used synonymously, without attaching particular meaning to the corporate form.

However, to explore the paradox of the importance of borders in a borderless world, we think it is useful to revisit some of the discussions from the 1970s when the concept of transnationalism first emerged. Central to this notion of transnationality is that it refers to activities that somehow move across the borders of nation states. It is not interstate activity which would be termed international, but rather cross-border activity that involves aspects associated with the state, such as the regulatory function, and that is conducted across borders, either by private actors or private actors acting jointly with state actors.

In his discussion, Huntington (1973, p. 336) provides a definition that distinguishes between transnational and national organizations, and also separates them from different types of international organizations:

An organization is “transnational” rather than “national” if it carries on significant centrally-directed operations in the territory of two or more nation-states. Similarly, an organization will be called “international” rather than “national” only if the control of the organization is explicitly shared among representatives of two or more nationalities. And an organization is “multinational” rather than “national” only if people from two or more nationalities participate significantly in its operations.

Following this definition, an organization such as the World Bank or the United Nations is formally international, but it is multinational in terms of its personnel and transnational in its operations. Similarly, most multinational corporations are transnational in operations, multinational in personnel, but ...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• Notes on Contributors
• 1 The Costs of Crossing Borders in the Global Economy
• Part I: Behavioural Assumptions in the Theory of the TNC
• Part II: The Footprint of the TNC: The Role of Borders and Distance
• Part III: Managing Cross-Border Interdependencies
• Part IV: TNCs as Institutional Entrepreneurs
• Index