Transnational companies in the digital era. A reconceptualization

This post has been contributed by Professor Grazia Ietto Gillies

It all started with Stephen Hymer (1960 [1976]) doctoral thesis and his fundamental distinction between foreign direct investment (FDI) and portfolio investment (Ietto-Gillies, 2019, Ch. 1). From then on, the concept of a transnational or multinational company (TNC or MNC) became tightly linked to FDI and its evolution.

UNCTAD (2017) and Casella and Formenti (2018) point out how companies in the so-called digital industries are achieving a high degree of transnationality in terms of foreign versus total sales with relatively little foreign direct investment. The foreign sales are not exports but a form of direct production abroad. In other words, it is possible to have high levels of direct foreign activity with low levels of direct investment. As digitalization proceeds and enters more and more deeply into a larger number of sectors, this phenomenon will increase in significance.

This evolution is the result of technological innovation. To it we must add similar changes as effect of another type of innovation which has been in operation for longer than digitalization: organizational innovation which is now enabled on a larger scale than in the past thanks to the use of ICTs (information and communication technologies). I refer to the externalization of much activity particularly by the large companies via a variety of contracts from franchise to subcontracting. In the international area we often use the generic term non-equity modalities of internationalization (NEMs).

Much literature dealing with externalization issues has concentrated on its impact on labour. However, there is impact also on capital: the responsibility and risks for much capital investment in such contracts is often passed on to the smaller party to the contract. It is the franchisee that owns or rents the premises of McDonald’s restaurants; it is the drivers who supply the vehicles cars used in transport on behalf of the Uber company. 

Thus, both technological and organizational changes lead to relatively low capital investment abroad by large TNCs. In my (2021) – where these issues are developed – I wonder whether we may have to rethink the conceptualization of the TNC. In reply to the question: “When is a company a TNC?” I write:  

“Involvement in direct business abroad is still the key element. However, in the XXI century direct business activity is no longer tied to FDI or not entirely; it can take place with little or no FDI in industries where technological and/or organizational innovation are of the essence such as – respectively – the digital companies; and the companies which engage in NEMs internationalization strategies. This means that elements other than just FDI must be taken into account when deciding whether a company can be labelled transnational and to what degree; for example, the relative extent of sales/revenue abroad and its geographical scope.”

The paper considers also the issue of transnationalization indices starting from the well-known UNCTAD transnationality index which has been estimated for the largest TNCs worldwide since 1990 and is published annually in their World Investment Report. Using data from companies’ reports, the transnationality index is computed as the average of three sub-indices: Foreign Sales/Total Sales; Foreign Employment/Total Employment; and Foreign Assets/Total Assets.  It is therefore a tri-dimensional index. The companies are selected by UNCTAD on the basis of foreign assets, thus using one of the three dimensions of transnationality.

Following an analysis of data and conceptual problems around the index, I come out with proposals for two modifications for the transnationality index. First, that the companies be selected on the basis of their total revenue; second, that a fourth dimension be added to the index over the three listed above: a dimension dealing with geographic extension, one that   allows us to take account of the number of countries in which TNCs operate. The reason why I think that the spread by nation-states is important, is because operating in a large number of countries gives the company extra power in terms of: (a) bargaining with labour, with suppliers and with governments; (b) spreading risks; and (c) giving the company benefits of learning from diverse organizational and technological environments (Ietto-Gillies, (2009 and 2019: Ch. 20, pp. 247-258).

References

Casella, B. and Formenti, L., (2018), FDI in the digital economy: a shift to asset-light international footprints, Transnational Corporations, 25, 1: 101-130.

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

Ietto-Gillies, G. (2009), ‘Conceptual issues behind the assessment of the degree of internationalization’, Transnational Corporations, 18 (3), 59–83, December.

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

Ietto-Gillies, G. (2021) ‘Transnationality in the XXI century. Concept and indicators’, Critical Perspectives on International Business, https://doi.org/10.1108/cpoib-11-2020-0135.

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