Transnational Corporation

Any corporation that is registered and operates in more than one country at a time; also called a multinational corporation.

A transnational, or multinational, corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries. The subsidiaries report to the central headquarters. The growth in the number and size of transnational corporations since the 1950s has generated controversy because of their economic and political power and the mobility and complexity of their operations. Some critics argue that transnational corporations exhibit no loyalty to the countries in which they are incorporated but act solely in their own best interests.

U.S. corporations have various motives for establishing a corporate presence in other countries. One possible motive is a desire for growth. A corporation may have reached a plateau meeting domestic demands and anticipate little additional growth. A new foreign market might provide opportunities for new growth.

Other corporations desire to escape the protectionist policies of an importing country. Through direct foreign investment, a corporation can bypass high tariffs that prevent its goods from being competitively priced. For example, when the European Common Market (the predecessor of the European Union) placed tariffs on goods produced by outsiders, U.S. corporations responded by setting up European subsidiaries.

Two other motives are more controversial. One is preventing competition. The most certain method of preventing actual or potential competition from foreign businesses is to acquire those businesses. Another motive for establishing subsidiaries in other nations is to reduce costs, mainly through the use of cheap foreign labor in developing countries. A transnational corporation can hold down costs by shifting some or all of its production facilities abroad.

Transnational corporations with headquarters in the United States have played an increasingly dominant role in the world economy. This dominance is most pronounced in the developing countries that rely primarily on a narrow range of exports, usually primary goods. A transnational corporation has the ability to disrupt traditional economies, impose monopolistic practices, and assert a political and economic agenda on a country.

Another concern with transnational corporations is their ability to use foreign subsidiaries to minimize their tax liability. The INTERNAL REVENUE SERVICE (IRS) must analyze the movement of goods and services between a transnational company's domestic and foreign operations and then assess whether the transfer price that was assigned on paper to each transaction was fair. IRS studies indicate that U.S. transnational corporations have an incentive to set their transfer prices so as to shift income away from the United States and its higher corporate tax rates and to shift deductible expenses into the United States. Foreign-owned corporations doing business in the United States have a similar incentive. Critics argue that these tax incentives also motivate U.S. transnational corporations to move plants and jobs overseas.