United Nations Conference on Trade and Development (UNCTAD) defines Transnational Corporations (TNCs) as incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls assets of countries other than its home country usually by owning a certain equity capital stake. An equity capital stake of 10% or more of the ordinary shares or voting power for an incorporated enterprise as its equivalent for an unincorporated one is normally considered as a threshold of the control of assets.
Transnational Corporations (TNC) may be defined as a company or an enterprise which operates in a number of countries and which have production and service facilities outside the country of its origin. The essence of TNC is that it takes its principal decisions in a global context. For this reason the decisions taken are often outside the countries in which has operations.
Firms become transnational for a number of reasons. The major reasons are as under:
- To Protect Themselves: Many firms become transnational when they face the risks and uncertainties of the domestic market. To reduce and minimize the negative impact of economic changes in the home country, firms expand their activities to other countries.
- To Expand the Market: Many firms find growing world market for their goods and services. As a result of globalization, most of the countries have removed trade barriers. There are no restrictions like quotas, licences, high-tariffs, administrative barriers etc., on the movement of products and factors. Hence, many firms have started to think in terms of global market.
- To Face Increased Foreign Competition: Many firms have become transnational to face increased foreign competition and to maintain their world market share. To counter the competitor’s strategy a firm also expands its operations in various countries including the home countries of competitors.
- To Reduce Costs: Many firms expand their activities to.various countries to ensure the reduction of costs. When a firm produces and sells-its products on large scale, it can eliminate transportation costs and avoid some of the selling and distribution costs. Besides, the firm can take advantage of local resources.
- To Reduce Tariff: The governments of some countries want to promote their exports by offering tax concessions, and other financial incentives to exporters. Many firms will like to become transnational to overcome tariff walls.
- To Take Advantage of Technology Expertise: Many firms become transnational to take advantage of its technological superiorities. These firms manufacture goods directly in the foreign market which facilitates acquisition of new technology. In this way, these TNCs maintain their international competitiveness.