The nation-state and the theory of the

transnational corporation
Grazia Ietto-Gillies
London South Bank University
The Open University

Abstract. The paper starts with a brief review of theories of the transnational
company (TNC) and its activities. It then considers the role of nation-states and their
frontiers and raises the question as to whether we need specific theories of
transnational companies and what is special about cross-borders operations to warrant
special theories. An analysis of dimensions of cross borders operations follows.
Relevance is given to the nation-state as locus of regulatory regimes. They provide
scope for specific advantages of transnationality and at the same time give rise to the
possibility of specific strategies to enhance these advantages. The advantages of
TNCs arise with respect to labour as well as governments. The activities of TNCs
have a fragmentation effect on labour. The paper stresses the following: a strategic
approach; strategies can be formulated towards various players in the economic
system as well as rival firms; advantages can be created via appropriate strategies; the
analysis of production elements and particularly conflicts with labour. The
conclusions draw policy and educational implications.

JEL: F21; F23

Key words: Multinational companies; theories of multinational companies;
multinational companies and labour; Multinational companies and governments;
multinational companies and nation-states.

iettogg@sbu.ac.uk

grazia.iettogillies@btopenworld.com

1
 The nation-state and the theory of the transnational corporations

Grazia Ietto-Gillies1

1. Introduction

The 1950s and 1960s saw a considerable growth in foreign direct investment (FDI),
particularly in the manufacturing sector and largely by American and British firms.
This signalled a shift from pre-WWII FDI which was on a much smaller scale and
mainly into resources. The shift brought the need for explanations since FDI could no
longer be attributed to the need to secure raw materials unavailable in developed
countries.
The new wave of FDI was indeed directed mainly towards other developed
countries. One line of questions this gave rise to was the comparative performance of
foreign and indigenous firms and the impact of FDI on the host country. These
questions form the subject of John Dunning’s early studies with reference to the
American manufacturing investment in the UK (Dunning, 1958).
Moreover, the scale of FDI increased to such levels that the conventional neo-
classical explanation which lumped together all types of foreign investment was
bound to be questioned. It fell on a young Canadian doctoral student at the
Massachussets Institute of Technology to do this questioning. It led him to make a
distinction between portfolio and direct foreign investment based on control. Hymer’s
doctoral research (1960 published 1976) went unrecognised for many years and was
published posthumously. However, he is now widely acknowledged as the ‘father’ of
the theory of the ‘international firm’.
It should pointed out that the subject matter of the various theories developed
in the last forty or fifty years is not always the same. Some focus specifically on
international production and its close proxy FDI, some consider other
internationalisation modes as well as FDI - such as trade or licencing or joint ventures
- some consider the transnational corporation (TNC)2 as a whole, in its evolution,
organization, and range of activities.
This paper proceeds in section two with a brief excursion into the main
theories of the transnational corporation 3 and an analysis of them in terms of some
key elements. This will be followed by a discussion of why we need to study the
TNCs and why national borders matter for their strategies (sections three and four).
The last section draws conclusions, policy and educational implications.

2. A brief review of theories

Hymer’s research can be broken into two phases: an early ‘radical’ phase consisting
mainly of his doctoral dissertation; and a later Marxist phase where his work on the
international firm (IF) led him to analyse wider issues such as the organization of
work; the relationship between the IF and the state; the relationship between the IF

1
I am grateful to D.A. Gillies and M. Yamin for useful co mments on an earlier draft of this paper.
2
The expression transnational corporation will, in general, be used in this paper. However, other
expression are used - such as multinational corporations (MNCs) or international firms (IFs) - when
they are used by other authors referred to in the text.
3
Detailed expositions and analyses of each theory are in Ietto-Gillies (1992 and 2004). Cantwell
(2000) contains a critical survey of various theoretical approaches.

2
and the developed and developing countries as well as the implications between its
activities and these countries (1970, 1971, 1972, 1979) 4.
The main tenets of his theory in the dissertation are: (1) the concept of control
which is crucial to the demarcation between portfolio and direct investment as well as
to the motivation behind the firm’s direct investment versus other internationalisation
modes such as licencing. Control features also in his later work in terms of managerial
control over labour. (2) Market imperfections and the related market power of firms
operating in oligopolistic markets is again key to his analysis of why firms invest
abroad5. In his 1968 article, Hymer draws on the work of Coase (1937) and further
develops his theory on the organisational side of the firm. Some of the points he
makes anticipate later work by the internalisation theorists. This article does not fit
easily into either his radical or Marxist phases.

Working not far away from the MIT where Hymer had written his dissertation
was Raymond Vernon based at the Harvard Business School and toying with similar
problems under a different approach. The starting point of Vernon (1966) is not the
firm as a whole but the product. He uses concepts from two major strands in the
existing literature in order to develop his ‘International Product Life Cycle’ theory.
One strand is on the various stages of the product’s life (Kutznets, 1953) and the other
on theories of trade based on the technology gap (Posner, 1961).
For Vernon, product innovation gives the innovative firm a monopolistic
advantage which it first exploits at home and then abroad. Its activities abroad
develop sequentially from exports modality to direct investment. The latter first takes
place in other developed countries and later in developing countries. As the product
goes from the innovative to the mature to the standardised phase, the level of
competition faced by the firm increases and so does the need to find new markets as
well as cheaper production locations. Corresponding to the phases of the product’s
life there are phases and sequences in the location of production in various countries.
This theory is distinguished from most of the others for its dynamic character: the
situation changes with time and the firm changes strategies to adapt to the new
situation and environment.
Innovation and technological advantages are the key to this theory which has
dominated the literature for many years amidst criticisms and doubts. A first incisive
critique was made by Vernon himself (1979). It was based on the idea that, by the late
70s, the macro environment had changed and so had the degree of
internationalisation. These elements led, respectively, to a smaller economic gap
between Western Europe and the USA and to a less cautious approach to
internationalisation by the firm.

The internalisation theory (McManus, 1972; Buckley and Casson, 1976;

Teece, 1977; Rugman, 1981; Hennart, 1982 and 2000; Caves, 1971 and 1982) of the
TNC has its roots in Ronald Coase’s theory of the firm (Coase, 1937 and 1991) in
which the firm grows as a result of attempts to economise on the costs of market

4
Most of his works - other than the dissertation - have been issued after his death in Cohen et.al.
(1979). Some are reprinted from already published work; a few saw publication for the first time. His
1968 article published in French, was largely ignored until it was discovered by Nicola Acocella and
then published in English by Mark Casson (1990).
5
A review of Hymer’s work is in Pitelis (2002). See also other articles in the same volume and
particularly Graham (2002) and Ietto-Gillies (2002), as well as Dunning and Rugman (1985) and
Yamin (2002).

3
transactions. These principles were further developed by Williamson (1975, 1981)
who extended them and applied the transaction costs notions to explain many aspects
of the firm from its organization to its development and growth. The root of the
approach is the assumption of market imperfections of transactional type, rather than
structural type as in Hymer’s dissertation6 or Vernon. These imperfections generate
costs and uncertainties which are best avoided by internalising the transactions. When
the internalisation occurs across national borders we have international production
and the TNC. The resource-based FDI between the two world wars led to
internalisation across border of the vertical type. After WWII much international
production was in manufacturing and embodied the results of research. Internalization
then is the outcome of an attempt to keep the results of research and innovation within
the firm while extending the range of markets and production location across borders.
In the last analysis the theory emerges from the assumption that the multinational
enterprise wants to reduce the costs and uncertainty of opera ting on the market. In
doing so it emphasises efficiency objectives and exchange rather than production
relations within the firm (Cantwell, 2000). The theory has led to a deepening of
studies on the organisation of production.

John Dunning has been a pioneer in the work on the activities of foreign
companies. He used his expertise and knowledge of the field to develop what he has
sometimes called a ‘theory’ or ‘systemic theory’ or a ‘paradigm’. His plan was to try
and explain the whole range of activities by MNC: trade, licencing or FDI (Dunning,
1977 and 1980). Under what circumstances do MNC engage in one or the other? Or,
to put it differently, under what conditions would a firm engage in direct production
rather than exports or licencing? And how is the country of investment to be chosen?
In order to supply answers to these questions he proposes a framework for the
analysis of three sets of advantages: ownership advantages help to determine why a
particular firm is in a favourite position to take up investment opportunities vis-à-vis
rivals; location advantages explain why a particular country is the preferred one for
investment location; internalisation advantages explain why - and under what
circumstances - the firm may prefer direct production to licencing. When the location
advantages favour production in the home country of the MNC, international
activities will take the form of exporting. When they favour a foreign country, we
have FDI (or international licencing if the internalisation advantages are not too
large). Each sets of advantages is given as a long list susceptible of further expansion.
The approach was bound to be hit by accusations that this so called ‘eclectic’ theory
was no more than a ‘shopping list of variables’ (Dunning, 2000b). Dunning’s reply is
that it must not be seen as a theory but rather as a ‘system’ or a ‘paradigm’ i. e. as an
umbrella for a variety of theoretical approaches (Dunning, 2000a).

Cantwell (1989, 2000) has put forward a dynamic, evolutionary approach to

the growth of the MNC based on innovation and technological accumulation. His
model is the result of a detailed empirical study of innovation activities in the
manufacturing sector of developed countries. He postulates that managers develop
their innovation activities in order to enhance their firm’s ownership advantages and
thus better compete with rivals. Firms invest in innovation activities in several centres
and benefit as they learn from diverse environments. Moreover, the benefits of

6
However, as pointed out above, Hymer (1968) uses Coase’s transactional costs to explain the growth
of the firm and, to some extent, of its multinational activities.

4
innovation and technology spill over to the industry and the locations in which the
MNCs operate and this induces other firms to invest in the same locations. The
spillover and agglomeration effects lead to the notion of endogenous location
advantages. The multiplicity of centres of innovation means that while we see a
hierarchy of firms in terms of technological accumulation, we do not have a hierarchy
of countries. This contradicts Vernon’s conclusions. The latter’s is a model of
technology transfer while Cantwell presents a model of technology creation and
diffusion.

In the last two decades we have seen, in the more traditional economics
literature, the emergence of interest in the TNC and its activities. The development of
New Trade Theories with their stress on agglomeration advantages and thus on the
geography of production was bound to raise interest in the activities on the TNC. This
has led to a variety of contributions (Helpman, 1984 and 1985; Helpman and
Krugman, 1985; Krugman, 1985 and 1998; Markusen, 1984, 1995 and 1 998) in which
the activities of the TNC are basically seen as multi -plant locations to be explained by
a combination of costs structure (including transport and other spatial costs) and the
existence of internal or external economies leading to agglomeration advantages.

These are the main theoretical approaches in the explanation of activities of

TNCs. Other authors have dwelt on financial flows as the main element (Aliber, 1970
and 1971) or in the context of countries’ different growth pattern (Aliber, 1993); some
have further developed the implications of oligopolistic structures for the
geographical pattern of FDI (Knickerbocker, 1973 and Graham, 1978, 1990) or for
the economy as a whole as well as for international production and its effects
(Cowling and Sugden, 1987).

The various theories highlighted above have many points in common, yet
there are also many differences. In particular some theories seem to have explicit or
implicit assumptions of efficiency objectives while others have been developed more
under assumptions of strategic objectives for the firm.
Short term profit maximization and marginalist analysis play a large role in
some theories and thus efficiency objectives play a strong role in them. The main
motivation behind FDI is the desire to organize production in order to minimise costs,
particularly market transaction costs. The internalisation theory falls into this
category; so does Dunning’s approach to some extent. The ‘New trade Theories’
approach to MNCs’ activities falls – in my view – also into this category. This is
because the costs elements as well as its equilibrium, marginalist analysis play such a
large role.
The development of strategies implies the existence of some degree of power.
Usually it is market power and the focus is strategies over rival firms for market
positions and shares. International production is therefore seen as the outcome of
strategies to increase market share/ market power or as a defensive response to
strategies from rivals. The key point is that international production is the result of
medium to long term strategies in which the main objective is market power, its
enhancement or its defence. Though, of course profit is the ultimate goal of any firm’s
strategy, the approaches do not usually use marginalist profit maximization
techniques. In a world of big players with uncertainty over the structure of costs and
the reactions of other players, with dynamic changes in the medium to long term, with
imprecise knowledge over the structure of costs and revenues, strategies may be more

5
the result of hunches than of precise mathematical optimisation. All, or most, theories
that stress market power have strategic elements in them (Hymer, Vernon,
Knickerbocker, Graham, Cowling and Sugden). Cantwell’s theory is built on the
specific assumption that firms behave actively and develop strategies to enhance their
ownership advantages in the innovation field.
The strategies considered in the various theoretical approaches refer to
strategies over rival firms and are therefore connected to the existence and
enhancement of market power. However, large firms can also have a degree of power
over other players in the economic and social system and in particular over labour,
governments in host or home countries or small and medium size enterprises. It is
therefore possible to conceive of strategies towards one or more of these players. I
shall return to this issue in the next two sections.

3. Why do we study the TNC?

One key element that hardly appears in any of the theories is the existence of nation-
states: do national frontiers as such affect the location of investment and if so how?
This element which seems key to the interpretation of TNCs’ activities, figures very
little in theories designed to explain them. It can only be detected in the analysis of
the reasons for the manipulation of transfer prices usually made attractive by different
tax rates in different countries. Krugman (1991) and other ‘New Trade Theorists’
consider the existence of nation-states in terms of costs – particularly spatial ones –
and in terms of restrictions they pose to the movements of resources – both human
and capital – and products.
In order to analyse whether and how the nation-state may be relevant as a
determinant of the size and structure of international production, we should address
the question in the title to this section. Why do we study the TNC and its activities?
This question may seem extraordinary particularly coming from someone who has
devoted the last twenty or so years to the study of transnational corporations and their
activities. Yet it is not such an absurd question. Indeed though the TNCs appear to
play such a large role in modern economies, conventional economics does not have a
big role for them in its theories. In most prestigious institutions the TNC may – at best
- be dealt with in two or three lectures in a course on industrial economics. Is this
unreasonable?
It is fairly common, in most economics text to ignore the TNC and therefore to
ignore the domestic versus foreign character of the investor or producer, or more
specifically, to ignore the actual nationality of the investor. Instead, concentration
tends to focus on such issues as the following: the firm in general or in relation to its
size; the market structure of an industry; the production, investment or trade of the
macro economy independently of the nationality of the firm producing, investing or
trading. This is exactly what we do when we study, for example, trade theory: we
analyse the relative 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 exporter is someone investing
abroad? Similarly, 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 Sicily. Why should
we consider the origin of the firm as relevant when it is from a foreign country?
What I mean is that the case for a special study of the TNC is not obvious.
Traditionally, economists have looked into the identity of the investor, when studying

6
the investment by public firms. However, the reason for this is clear: the public
investor is assumed to have different objectives compared with the private one and
thus the identity private/public does matter. But this is not the case when the investor
is a TNC. Whether the firm is foreign or domestic, whether it is a transnational or a
uninational firm the objectives are not different; they are profit objectives. In fact the
reason why in our case the uni- or multi-national character of the investor matters has
nothing to do with objectives but with strategies. To this point we now turn.

3. National frontiers and TNCs’ strategies7

There are three dimensions to operations across national frontiers:

1. Spatial/geographical dimension. The distance between locations in different

nation-states is often greater than the distance between locations within the
same nation-state. But this is not always the case. For example, the distance
between Milan and Reggio Calabria is greater than the one between Milan and
Geneva.
2. Cultural and linguistic dimension. The cultural distance is usually greater
between nation-states than between regions of the same nation-state. But
again, this is not always the case. The cultural distance between Milan and
Geneva is probably lower than the one between Milan and Reggio Calabria.
3. Regulatory regimes dimension. By regulatory regime I mean the sets of all
laws, regulations and customs governing the economic, social and political life
of a country. It therefore includes the sets of rules governing production,
markets and the movement of resources across countries. Each country has a
specific regulatory regime and thus a specific set of rules and regulations
which have often historical origins and connotations. Countries differ – often
substantially – in terms of their specific regulatory regime. However, the
regulatory regime tends to be fairly – though not completely – homogeneous
and consistent within each nation-state. In particular, different nation-states
have different:

• Currency regimes
• Tax regimes
• Rules and regulations regarding the social security system and in particular
different regimes regarding labour and its organisation

It is particularly the third dimension that characterizes each nation-state though the
other two can also contribute to the differences between states. Moreover, it is the
third dimension that generates opportunities – as well as some costs – for taking
advantages of economic activities across frontiers.

The existence of different frontiers may generate additional costs of business

activities. They are associated mainly with the first two dimensions, though for the
TNCs organizing and managing under different laws, regulations, customs, may also
be costly. There may also be costs of forgone economies of scale, if production is
spread in too many locations.

7
The arguments in this section are further developed in Ietto-Gillies (2001: ch. 6).

7
 However, the third dimension may give rise to specific advantages of
transnationality per se. One author who gives particular relevance to the advantages
of multinationality is Kogut (1983) who considers the existence of a multinational
network to be “…an important contribution to the value of the firm…” (p. 41). He
mentions three characteristics that enable the MNC to take advantage of its
multinationality: “…one, the ability to arbitrage institutional restrictions; two, the
informational externalities captured by the firm in the conduct of international
business; three, the cost saving gained by joint production in marketing and in
manufacturing.” (p. 42). These are relevant advantages thet accrue to the firm through
the historical development of its multinational network. Kogut does not consider the
possibility of created advantages through the firm’s strategic behaviour.
Here the advantages of transnationality will be considered from two
perspectives: (1) the possibility that such advantages can be actively created by the
firm’s strategic behaviour and in a variety of fields 8; (2) the possibility that strategic
behaviour to create advantages can be used towards other players in the economic
system as well as rival firms.
The following are specific advantages of transnationality linked to the
existence of different regulatory regimes:

• Advantages towards labour

• Advantages in negotiations with governments
• Advantages regarding different currency and tax regimes
• Advantages of risk spreading

Companies that can truly plan, organise, control across frontiers can also
develop strategies to take advantage of differences in regulatory regimes across
frontiers. Thus the existence of different currencies and taxation laws may, for
example, give them the opportunity to develop location and intra-firm transfer
strategies that give them the benefit of transfer prices manipulation and therefore of
higher profits than they would otherwise have achieved 9.
It is particularly with regards to labour that the opportunity to develop
advantageous strategies arises. Unlike the TNC, labour has, so far, been unable to
organise itself across frontiers. Moreover, labour solidarity across frontiers tends to be
much lower than within frontiers. This means that whenever a TNC has production
spread into many nation-states it faces a labour force working for it that is more
fragmented and less able to organise and resist the demands of corporate capital. This
situation should be assessed in comparison with one in whic h the same labour force
were all to be employed by the same company to produce the same amount of output
in one single country. The latter situation would make labour organisation and
resistance much stronger. Thus a strategy of international location may also be a
strategy of labour fragmentation10.
A strategy of fragmentation weakens the power of labour to resist in any
conflict with capital. This effect is compounded by another type of fragmentation
strategy which has been pursued in the last two decades by large uni- and multi-
national organisations in both the private and public sector. I refer to organisational
8
As we saw Cantwell (1989) develops the notion of actively created advantages in relation to rival
firms in the specific field of innovation and technology.
9
This is a point developed in Aliber (1970).
10
Cowling and Sugden (1987) and Sugden (1991) talk of ‘divide and rule’ strategies of TNCs’ towards
labour. See also Hymer (1972).

8
fragmentations in which businesses outsource part of their activities thus forcing the
labour force previously all working for the same organisation, to work for a variety of
enterprises. This makes it more difficult for labour to organise and resist.
Transnational companies can – and do – play governments of different
countries or regions against each other with the objective of raising the offer of
financial incentives for the location of inward FDI (Oman, 2000; Phelps and Raines,
2002). The fact that the company operates with a large multinational internal network
makes any threat of relocation of production very credible as it could be achieve d
with relatively low costs. Thus the TNC with a production network spreading into
many countries11 has a strong element of bargaining power towards both governments
and labour force.
Moreover, location of production in several countries will spread the risks,
particularly those associated with political or labour unrest. It may also enhance the
company’s innovative power as it learns from different environments (Cantwell, 1989
and 1995).
The conclusion is that the transnational company - by virtue of operating
effectively across different nation-states and thus across different regulatory regimes -
has wider opportunities for developing strategies designed to improve its position vis-
a’vis other actors in the economic system who are less able – so far – to operate
across frontiers as effectively as the TNC. In this approach the spread of production in
many countries becomes one of the strategies to achieve long term profits.
So the reason why we must study the TNC and why the nationality of the
company matters is not due to its having different objectives from other firms (as in
the case of private versus public companies) but to its having different and wider
opportunities for strategies to pursue its profits aims.
When we are dealing with large and powerf ul organisations, a strategic
approach is necessary for the understanding of their activities, their motivations and
implications. However, we must also move from a strategic approach focused only on
strategies towards rivals, in the direction of an approach that considers also TNCs’
strategies towards other players in the economic system such as strategies towards
labour or governments. Success in the latter types of strategies is also likely to give
the firm a competitive advantage towards its rivals. The activities of TNCs and their
patterns – both in terms of modality and geography - can be better understood by
concentrating on the production more than on the exchange side. Within the
production side, a variety of elements are important and particularly conflicts with
labour.
This section stressed the fragmentation effects of TNCs’ activities. Yet the
TNCs are often associated with an integration role in the context of the global
economy. Do they integrate or fragment? It all depends on the perspective from which
we look at the issues.
From the point of view of the labour force working for them, production
spread in many countries, fragments it and thus affects its power to organise and
resist. Another instance of fragmentation can be seen if we look at the issue from the
point of view of the production process. Whenever production is located in many
countries on the basis of vertical division of the production process, the latter is
geographically fragmented.

11
On the theoretical and empirical analyses of international networks of the world’s largest TNCs cf.
Ietto-Gillies (2001: chs 3, 4 and 5).

9
 However, from the overall perspective of countries, the increased volume and
value of activities across different nation-states leads to a higher degree of integration
of the countries concerned. The conclusion is that the TNCs play a double
contradictory role: they integrate countries while they fragment the labour force
working for them or the production processes they organize.

4. Conclusions, policy and educational implications

The paper starts with a brief excursion into the main theories of the transnational
corporations and international production and a highlight of some key elements in the
theories. It then discusses the reason why the existence of national frontiers matters
for the firm’s decisions and introduces the main dimensions to operations across
nation-states that are relevant for the strategies of TNCs. The firm’s advantages of
operating across frontiers were highlighted with particular reference to its negotiating
strength towards labour and governments.
The strategies are related to the fact that the TNCs can plan, organise, contr ol
and optimise across national frontiers while other economic actors cannot, or not yet
do so to the same extent as the TNCs. This is particularly the case of labour. Several
major implications derive from this approach.
The first set of implications relates to possible policies. If we have an actor
that derives greater advantages and strength from multi-national activities when
facing other actors who do not, then two possible type of solutions emerge: (1)
strengthening the multi-national bargaining power of other actors in the economic
system such as labour or SMEs; and/or (2) developing laws and regulations at the
national and international level that give other actors a more level playing field. For
example, moving towards the elimination of financial incentives paid by governments
to attract inward foreign investment. Such incentives play one national (or regional)
government against the other without increasing the overall amount of investment
world wide. Indeed they are unlikely to affect the geographical distribution of inward
FDI as the incentives are not a decisive element in TNCs’ investment decisions.
Labour skills, access to markets, physical and human infrastructure are more relevant
variables in TNCs’ decisions (Marginson et al., 1995). Another element relevant for
policy is the fact that the advantages created by multinationality favour the large, well
established multinationals with networks in many countries. A high degree of
multinationality could then act as an entry barrier for smaller companies, particularly
those from developing countries (Kogut, 1983).
The second set of implications is in terms of research and has to do with our
understanding of the economic system. Economic theory has always had an
‘aggregation’ problem. Our theories at the micro or meso level do not quite fit in with
the theories at the macro level. Conversely we are not clear as to what theory of the
firm underpins our macro theories and models. We do not really know how to make
the theoretical jump from one of the three levels to the others.
Traditionally there was only one clear dimension on which there was
consistency among the three levels. We always argued and developed models on the
basis of firms, industries, macro aggregates – such as value added, trade, capital
formation, aggregate consumption – being related to a specific territory: the territory
of the nation-state. However, the increase in the activities of TNCs makes this
element no longer consistent at the three levels.
At the macro level, we are still interested in what happens within a territory
delimited by national frontiers; yet the firms that operate within it have different

10
territorial horizons as well as strategic and optimisation fields. Moreover, the structure
of the industries and markets is increasingly shaped by competition at the
international rather than the national level. If we could continue to believe that the
national frontiers do not matter for firms’ strategies than we could ignore the
consequences of this territorial discrepancies. But this is clearly not the case as was
argued in the previous two sections. So we just have to acknowledge that we have one
further ‘aggregation’ problem: the problem of considering at the macro level the
actions of units that optimise across frontiers and how this might affect the macro
outcomes.
One example here might help. We study international trade usually with
reference to the comparative advantages of the nation-states. However, we also know
that around three quarters of world trade originates with TNCs and indeed over a third
of world trade takes place on an intra-firm basis. We also know that the location
strategies of TNCs may be affected by the possibility of advantages of multi-
nationality and thus not be related only to territorial comparative advantages only.
This means that the strategies of TNCs and their optimisation across wider territories
than the ones delimited by the nation-states, may be crucial to our understanding of
the geographical pattern and size of world trade.
The last ten years have seen a very considerable growth in research on the
activities of TNCs with increase in the number of publications in traditional
prestigious economic journals as well as in the more business studies literature.
However, there are still two problems. First, the full consequences of the activities of
TNCs for the meso and macro economies have yet –as far as I know - to be analysed,
let alone be solved. Second, the increased interest in research has not yet spread to the
curricula: economics students may still obtain their degrees having been taught
nothing – or very little - about the TNC and its activities. They may pick up a few –
often inaccurate - notions from the press or the anti-globalisation movements.
The transnational corporations and their activities have penetrated the
economy and the awareness of society at large to a far greater extent than they have
penetrated our undergraduate and graduate curricula and the consciousness of
academic economists12. It may be time to correct the imbalance.

References

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16