Theories of Transnationalization
There are several theories in economics explaining the phenomenon of TNCs:
- tax evasion;
- monopolistic advantages;
- Transaction costs;
The theory of tax evasion. Foreign direct investment depends on the tax burden of the host country. The higher the level of tax rates, the more active the firm is looking for legal and illegal ways to reduce the tax burden. One of the most proven methods is to search for the host country where the lowest tax rates are set. The mentioned problems are solved in two ways:
- TNCs open their branches in countries with minimal taxation;
- TNCs, having a network of branches in different countries, use transfer prices when moving goods between branches of corporations.
The theory of monopolistic advantages. The theory is based on the premise of the existence of barriers to entry to the market of foreign enterprises. Such barriers can be: discrimination by market participants; increased level of risk; shortcomings caused by large geographical distances; sociocultural factors, etc. The consequence of the existence of these barriers is the direct investment abroad, resulting from the desire of enterprises to grow in the event that:
- Foreign companies have monopolistic competitive advantages over local competitors;
- these advantages allow this enterprise to overcome barriers to entry to the market.
The monopolistic advantages can be, for example: superior technology, special managerial abilities, better access to capital, adequate organizational structure.
The key position of the theory is foreign direct investment, with the aim of exploiting the existing monopoly advantages.
Theory of transaction costs. Transaction costs - or some of their components - represent a form of investment.
■ Transaction costs are the costs of the firm related to the transaction, for example, the cost of acquiring the information necessary to establish contact with counterparties, ensuring the most favorable terms of the transaction, reducing the risk of default or failure to fulfill other contract terms .
The theory explains the results of the choice between different forms of market entry. In accordance with this theory, the decision between the market and the creation of a hierarchy (for example, between export, joint venture and 100% subsidiary) depends on the type of transaction and the costs associated with this transaction. At the same time, transactions differ in frequency, degree of uncertainty and the amount of investment required for this transaction. In accordance with this theory, the firm will give preference to the export strategy if the size of the investments to be invested is small if the investments are made often and the risks and uncertainties are small. On the contrary, when the size of the required investment is large, the frequency of investment is high, the uncertainty is very high, then it is better for the firm to choose the form of establishing a subsidiary with 100% capital.
One of the empirical studies was to determine to what extent the decision to choose a particular form of entry into the market really depends on the transaction costs. On the example of a transfer of technological and marketing know-how in the engineering industry it was proved that strategically important investments in sales and advertising lead to a high degree of probability for such forms of market entry that are characterized by a low dependence on cooperation and a high degree of capital investment. The transfer of technological know-how, on the contrary, has only a small influence on the choice of the form of entry into the market.
The theory of internalization. Explains why a firm decides to move from a cooperative strategy to creating a hierarchy - a network of branches and subsidiaries.
It is based on the theory of transaction costs. The starting point of the theory is the existence of imperfections in the market (for example, information asymmetry, the lack of adequate information sources), which leads to the inhibition of market exchange.
Overcoming these imperfections of the market leads to the appearance of transaction costs.
The size of these transaction costs is the factor that determines the company's choice: internalization and externalization - internal (inside the company itself) or external to the firm (through various forms of cooperation) using the competitive advantages that possesses the given firm (for example, knowledge, cost of business communications of firm).
Disadvantages of the external use of the know-how through cooperation are:
- insufficient control over the competitive advantage;
- the danger of breaking the business ties of the company;
- the appearance of transaction costs.
The company always weighs the merits and demerits of the cooperation strategy, and if the shortcomings are greater and the transaction costs are too high, then the company chooses the strategy of creating a hierarchy - creating a network of branches and divisions of the enterprise.