Skip to content

The transnational corporation and economics

Download the WEA commentaries issue ›

By Grazia Ietto-Gillies 1

  1. Where are we on the study of TNC?

There is now a very large body of literature on theories of the transnational corporation (TNC) and the subject has reached a suitably mature stage to have a history of economic thought about it.2 The first theory of the ‘International Firm and its Operations’ was developed in 1960 by Steven Hymer, a Canadian student working for a doctorate under the supervision of Charles Kindleberger at the Massachusetts Institute of Technology. A British scholar at the University of Reading was, contemporaneously. researching the effects of American investment in the UK. John Dunning later developed his own very successful theory (1977 and 1979) and continue to do theoretical and applied research in the field till his death a few years ago. Many theories and studies have been developed on both sides of the Atlantic in the intervening decades, in particular the so-called ‘Internalization theory’ by Peter Buckley and Mark Casson (1976) also at the Reading University. The theory has recently been updated by Casson (2018).

The subject of ‘International Business’ is now well developed and most theories of the TNC are developed and taught in its multi disciplinary context. However, the study of TNCs has not been fully accepted within the academic economics profession – including the non-orthodox academics – and is rarely an integral part of the curriculum though there may be a few lectures within the context of a course on industrial economics. I should, however, add that among the theories developed in the last few decades are the so-called New Trade Theories of the transnational company which have engaged high profile economists such as: Krugman, Venables, Markusen.3 These are developments from the internalization theory and both strands fall generally within the neo-classical paradigm. They are interesting, but they do not alter the fact that, on the whole, the subject matter is highly marginalized in economics curricula. Yet the TNCs as a whole and often single TNCs have profound effects at the macro level including those on government policies. The relevance of TNCs’ activities at the macro level should be clear from a couple of statistics: world wide TNCs are responsible for some 80 percent of world trade. Their location strategies affect the geographical and sectoral structure of trade. Moreover, about a third of such trade is intra-firm (UNCTAD, 2013). As the XXI century progresses the activities and relevance of TNCs for the world economy are increasing.

I should first explain why I consider a study of TNCs and their activities important and indeed necessary in the current phase of capitalist development. To the lay person it would seem obvious that we need to study the activities of the most important economic agents operating today: transnational companies. Yet, though we see now and then in economics journals publications on FDI, the study of TNCs as a whole and of their multifarious activities has made few inroads into the main theoretical body of economics. To paraphrase Robert Solow – my old and excellent teacher at the MIT in 1967 – you can see the transnationals everywhere but in the economics curricula.4

Why this state of affairs? We could dismiss this issue as just some evidence of the divorce between theory and reality on the part of many economists, particularly those working within the mainstream paradigm. There may be some truth in this but it is certainly not the whole story. Moreover, non-mainstream approaches fare no better on this issue.

There are deep reasons – linked to both methodology and subject matter – why economic researchers have been unable or unwilling to fit the TNC and its various activities into the main body of their theories. There are also very good reasons why the topic should now be given a stronger role in economics research and curricula. To both of these I now turn.

Let us begin by trying to see the reasons why the TNC and its activities have no specific place in economic theory. Let us assume for a moment a wholly theoretical world in which all national barriers and frontiers have come down; one single currency circulates; a single tax regime is in operation. In other words, the world becomes one single country/nation-state and is governed as such. In such a world we would have no theory of international production and of TNCs: there would be no need for it. We would work within the confines of spatial location theory to explain where production is located and with theories of the firm, business governance and market structure to explain the growth of firms, their boundaries, their organization and their behaviour vis-à-vis other firms. Thus we would not need a theory of transnational companies to understand who invests, where and why. Theories of transnational companies and of foreign direct investment are needed because we have nation-states and frontiers.

In fact we do not attach much relevance to the identity of the investors when they originate from other regions within the same nation-state, for example when a Texan firm invests in Michigan or a Tuscan firm invests in Calabria. Why should we consider the origin of the firm as relevant when it is from a foreign country?

In general, when analysing economic activities, economists tend to ignore the actual nationality of the investor. Instead, the main focus has been on issues such as: the firm in general or in relation to its size; the market structure of an industry; the production, investment or trade of the macroeconomy independently of the nationality of the firm producing, investing or trading. This is exactly what we do when we study, for example, international trade theory: we analyse the comparative conditions and advantages of the trading countries and/or the impact of trade on them independently of the national identity of the exporter firm. Why should we bother with such identity when the operator is someone investing in many countries?

Might theories of TNCs and foreign direct investment be redundant and trivial? Could it all be subsumed under theories of investment independently of the nationality of ownership or the investor? Or under the theory of the firm in general? Is there much point in developing theories of ‘international’ production and investment or the ‘international’ firm? Would not theories of production, investment and the firm take care of everything there is to know about the location of investment and production, and of the behaviour of firms and their entry modes into foreign markets?

This is indeed the – tacit – approach taken in most traditional economics departments in which the international economy is dealt with at the macro level by teaching and research into issues of international trade, the balance of payments and exchange rates. Moreover, at the micro level, theories of the firm and investment are not usually analysed in the context of the ‘nationality’ of the investor or the country in which the investment has taken place. Characteristics of companies other than multinationality (such as size) are considered in the context of oligopoly and of market structure theories in general. On the teaching side, multinational companies, their existence, growth and range of activities, are usually dealt with in a couple of lectures within a unit on industrial economics or the students are advised to attend lectures in a business/management department to learn about TNCs.

  1. Why we need specific theories of the TNC

The traditional approach can indeed be justified if one takes the view that the nationality of the investor and the transnationality of operations make no difference to the geographical pattern of investment and production or to the overall amount of production or to its impact on the country where the investment takes place. Economists have traditionally looked into the identity of the investor when analysing the investment by public versus private firms. The reason for this is clear: the public investor is assumed to have different objectives compared with the private one and therefore the private identity versus the public one does matter. However, this is not the case when the investor is a TNC. Whether the firm is foreign or domestic, whether it is a multinational or a uninational firm, the objectives are not different; they are profit or profit-related objectives.

In fact, the reason why in our case the uninational or multinational character of the investor matters, has nothing to do with objectives but with strategies. The argument for specific studies of the TNCs and for their incorporation into the main body of the economics curriculum is that the existence of nation-states has a bearing on firms’ strategies. Such strategies affect the levels and patterns of world investment, production and trade, and they affect the economic and social context in which other agents – such as labour, uninational firms or governments – operate. They do, in particular, affect the context of government policy. This is the main reason why a study of TNCs and their activities is important, and indeed basic, for an understanding of the activities of firms, industries and national economies in the global context.

The nation-states generate opportunities for specific strategies for companies that operate across them. The strategies are connected with the fact that each nation-state has specific regulatory regimes on:

  • Rules and regulations regarding the social security system and in particular different regimes regarding labour and its organization
  • Fiscal regime including corporation tax and customs and excise duties as well as non-trade barriers
  • Currency regimes
  • Regime of industrial policy with regard to incentives to businesses

By operating across different nation-states, TNCs may face extra costs compared to location at home where the environment is better known to their managers. However these are compensated by the extra advantages that operating in several foreign countries gives them. For a start they can achieve advantages of: (a) risk spreading; and (b) acquisition of knowledge and innovation from the diverse environments. But the main advantages are in terms of operating in the context of different regulatory regimes; this allows them advantages in negotiations with specific actors. In particular:

  1. Negotiations with trade unions pay and conditions
  2. Negotiations with governments about tax concessions or special subsidies

Moreover, the different tax regimes give scope for arbitrage strategies designed to minimize the overall tax liability of the company world wide. The fiscal advantages deriving from operating in different nation-states can be several and become cumulative. There may specific concession in terms of lower tax rates for foreign investor by governments eager to attract investment, create jobs and gain electoral advantages. But operating in different countries generates also scope for financial engineering: by creating new companies and locating them into low-tax regime countries, companies can syphon-off profits. Moreover, operations in many countries characterized by different rates of corporation tax allows them scope for the manipulation of transfer prices (OECD, 2010; Ietto-Gillies, 2019a, Ch. 23). Such manipulation is illegal but very difficult to detect; other strategies are legal such as the setting up of special companies in tax havens countries. There are losers in these games: the governments and the countries whose legitimate profits have been syphoned-off.

The digital companies, mostly headquartered in the USA – such as Facebook and Alphabet – the owner of Google – are in a particularly advantageous position in this respect. Their profits are very difficult to track down given their specific business models.5 However, their revenue can be tracked down and allocated to the countries where it is raised. Hence the OECD proposals first to avoid low-tax competition by countries and second to tax revenue rather than profits which is something many countries do with the Value Added Tax or Sales Taxes. Discussions about a revenue tax have been going on for some time particularly at the level of the EU. In July 2019 under pressure from the gilets jaunes movement, President Macron has introduced such a tax. However, President Trump has reacted negatively and threatened retaliatory policies. The issue is ongoing.

The many issues related to the digital companies – from theoretical issues in respect to the definition of TNCs to home versus foreign assets to location od profits for tax purposes – are discussed in Ietto-Gillies (2019b) a paper prepared for the WEA Conference on Digitalization: GOING DIGITAL: What is the Future of Business and Labour? 15th November – 20th December 2019.

  1. Conclusions

The study of the TNCs though highly developed within the ‘International Business’ academic community, is not yet fully incorporated into research and teaching by the economics community. This is a very unsatisfactory state of affairs particularly given the very large and growing relevance of TNCs in production, trade investment and world development. The relevance is with regards to their growth and impact on countries and societies but also with regards to their impact on policies.


Barba Navaretti, G. and Venables, A.J. (2004), Multinational Firms in the World Economy, Princeton and Oxford: Princeton University Press.

Buckley, P.J. and Casson, M.C. (1976), ‘A long-run theory of the multinational enter- prise’, in P.J. Buckley and M.C. Casson (eds), The Future of the Multinational Enterprise, London: Macmillan, pp. 32–65.

Casson, M. (2018a), The Multinational Enterprise. Theory and History, Cheltenham, UK and Northampton, MA, USA; Edward Elgar.

Dunning, J.H. (1977), ‘Trade, location of economic activity and the MNE: a search for an eclectic approach’, in B. Ohlin, P.O. Hesselborn and P.M. Wijkman (eds), The International Allocation of Economic Activity, London: Macmillan, pp. 395–431.

Dunning, J.H. (1979), ‘Explaining changing patterns of international production: in defense of the eclectic theory’, Oxford Bulletin of Economics and Statistics, 41 (4), 269–95.

Hymer, S.H. (1960), The International Operations of National Firms: A Study of Direct Foreign Investment, 1976 edition, Cambridge, MA: MIT Press.

Ietto-Gillies, (2019a), Transnational Corporations and International Production. Concepts, Theories and Effects, Cheltenham, UK and Northampton, USA: Edward Elgar.

Ietto-Gillies, G., (2019b),

Krugman, P. (1998), ‘What’s new about the new economic geography?’, Oxford Review of Economic Policy, 14 (2), 7–17.

Markusen, J.R. (1984), ‘Multinationals, multiplant economies and the gains from trade’, Journal of International Economics, 16 (3/4), 205–24.

Organisation for Economic Co-operation and Development (OECD) (2010), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators, Paris: OECD.

Solow, R. M., (1987), ‘We’d Better Watch Out’, New York Times Book Review, 12 July.

United Nations Conference on Trade and Development (UNCTAD) (2013), World Investment Report 2013. Global Value Chains: Investment and Trade for development, Geneva: United Nations.

United Nations Conference on Trade and Development (UNCTAD), (2017), World Investment Report 2017. Investment and the Digital Economy, Geneva: United Nations.


  1. Emeritus Professor of Applied Economics London South Bank University and Visiting Research Professor, Birkbeck, University of London. Grazia has been one of the founding members of the WEA
  2. See Grazia Ietto-Gillies (2019a) for a comprehensive review of theories in their historical context as well as of relevant concepts and effects of TNCs’ activities.
  3. See Barba Navaretti and Venables (2004); Krugman (1998); Markusen (1984).
  4. Solow (1987: 36) wrote: “You can see the computer age everywhere but in the productivity statistics”
  5. See also UNCTAD (2017).
  6. See Norbert Häring in:

From: pp.5-8 of WEA Commentaries 10(1), February 2020

Download WEA commentaries Volume 10, Issue No. 1, February 2020 ›

Respond to this article

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please note that your email address will not be published.