Question

Why do firms become transnational? Discuss various theories explaining emergence of transnational corporations in the world economy?

Answer 1

1. To protect themselves: The firms are exposed to the risks and uncertainties of the domestic

business cycle. By setting up operations in another country, they can often diminish the

negative effects of economic swings in the home country.

2. To tap the growing world market: As a result of globalization, the rapid growth of similar

goods and services are produced and distributed by TNCs on a world scale. The firms want to

tap such a growing world market for goods and services.

3. Response to increased foreign competition: The Firms become transnational in response

to increased foreign competition and to protect world market shares. In order to follow the

competitor's strategy, the firm sets up operations in the home countries of competitors.