Peculiarities of legal regulation of transnational corporations

Table of contents: The Kazakh-American Free University Academic Journal №4 - 2012

Author: Kunanbayeva Gulmira, Kazakh-American Free University, Kazakhstan

Interrelated reaction of rapid growth of direct investment, the interrelation of scientific, commercial and industrial activities of economic branches and national borders is connected to establishment of giant international companies with branches in different countries and continents. In English speaking countries, the term "Corporation" is defined as a joint-stock company.

Transnational corporations (hereinafter: TNC) have become the main driving force of economic globalization.

Validating the place of transnational corporations in the process of economic globalization, we would like to highlight the importance of these subjects on the international level, the concept, characteristics, types of TNC, and the need to study and improve the legal regulation of their activities.

The role of TNC in the process of globalization is ambiguous. On the one hand, they are important in the improvement of the world economy, giving a chance to developing countries to raise national economy, acting as a host country, on the other hand, TNC sharpen contradiction between these levels of the economy; encourage the growth of monopolies through mergers and acquisitions. As a result, the competition comes to a rivalry of commercial and industrial giants, making it difficult to new producers to enter the world market.

According to the statistics of UNCTAD, transnational corporations control 50.7% of the production of electrical and electronic equipment and computers in the world, 48.4% of automobile industry, 53.3% of oil and mining, 78.9% of food production, beverages and tobacco; 58.4% of chemical industry, 62.4% of pharmaceutical industry, 43.5% of iron and steel industry, 73.2% of construction sector [1].

The problem of legal regulation of TNC is topical issue in Kazakhstan. The President of the Republic of Kazakhstan Nursultan Nazarbayev emphasized that large foreign transnational corporations are expanding their operation in the country. "In this connection it is necessary to pay special attention to the protection of rights of working Kazakhstani citizens. Companies operating on the territory of our country must respect its laws and trade unions should be actively involved in issues of working hours and pay equity" [2].

Scheglov S.S. defined the concept of TNC as the following: a transnational corporation is a group of related entities, their offices and affiliates, established and operating under the laws of several (two or more) countries, characterized by the presence of the central structure, which provides a single management of its members by participating in the property relations over prevailing equity capital stake (parent enterprises and their foreign affiliates), the merger agreement of assets in order to create a group or functioning of an investment fund of a company [3].

The country where a head office is located or where the corporation was initially established is a home country.

The characteristic of TNC is a combination of central management with a certain degree of self-sufficiency of affiliates located in different countries but in their turn being an integral part of a corporation.

Taking into account that the definition of the concept "transnational corporation" affect the interests of many countries, a compromise version of the definition of "TNC" in the Commission on Transnational Corporations of the United Nations says that TNC is a company comprising affiliates in two or more countries, regardless the legal form and fields of activity , which operates within the framework of making decisions and is able to conduct policy and implement a common strategy by one or more centers, where the individual units are connected by ownership or otherwise, so that one or more of them may have a significant influence over the others, and in particular to share knowledge, resources and responsibility with others [4].

Thus, TNC is a huge network of enterprises, related by industrial and commercial characteristics, controlled by the head office, the operation of which is beyond the national regulation, under the impact of the legal systems of different countries, contributing to the increase of internationalization of the world.

Among economists, there is no single concept of transnational corporations. There are three schools based on different factors and facts determining the different ways of establishments and development of TNC.

Concepts (Schools):

- School of stage development.

- School of direct investment.

- School of global development.

It should be mentioned that each concept has its drawbacks. This is one of the reasons that scientists are still trying to develop new theories to explain the development, formation of corporations on the basis of the analysis of other previously unexamined factors [5]. Velyaminov G.M. identified the following features of TNC, regarding legal aspects: firstly, formally it is an enterprise controlling its foreign affiliates, and which is under the national jurisdiction of the respective countries. In fact, TNC is a multinational and transnational enterprise.

Secondly, another feature is that the foreign offices of TNC, its affiliates, subsidiaries, under the jurisdiction of the receiving country registered there formally and is an enterprise of the receiving country, but in fact, is foreign, as its connection, the dependence on foreign head of TNC is much more complex and important than the receiving country.

Thirdly, special feature of TNC is the fact that in many cases, usually the parent company of TNC conducts negotiations directly with the host countries, or potentially host, or just countries as business partners [6].

After Lunts L.A., Boguslavsky M.M. distinguished and characterized three types of TNC.

The first group includes national societies, trusts, companies with numerous foreign affiliates and subsidiaries. This means monopolies with national capital and global market.

The second group of transnational corporations is trusts and concerns, which are international, not only by industries, but also by the capital. In contrast to the monopoly of the first group, they belong to the capital of several countries.

A common feature of these two groups is that both monopolies are established as a legal entity of one country. In other countries, both monopolies have numerous branches, affiliates, and subsidiaries.

Finally, the third group includes numerous international monopolies and cartels, syndicates and associations of industrial and scientific-technical, non-legal entities [7].

The following types of transnational corporations are distinguished:

- Horizontally integrated corporations with enterprises which produce most of the products. For example, automobile manufacture in the U.S., or enterprise network "Fast Food".

- Vertically integrated corporations that are under one owner, and under the control of a single most important areas in the production of the final product. In particular, in the oil industry crude production is often carried out in one country, refining - in another, and the sale of finished petroleum products - in third countries.

- Diversified transnational corporations, which include national companies with vertical and horizontal integration. A typical example of this type of corporation is a Swedish corporation Nestle, which has 95% of its production abroad and carries on restaurant business, food production, sales of cosmetics, wines etc. The number of such companies in recent years is growing rapidly [8].

Directly covering the aspect of legal regulation of TNC, it seems that the most successful model is that one proposed by Dmitriyeva G.K., which distinguishes three levels: national legislation, bilateral and multilateral agreements [9].

Domestic regulation implies that branches and subsidiaries of TNC comply with national legislation of the host country. In most cases, this is an investment legislation to define the legal status of the foreign investor: a person or entity. However, the most vulnerable point in the unilateral regulation of TNC is that, thanks to its organizational structure, it is able to avoid control by a single country. Therefore, national law of this country is not enough for the regulation of TNC.

Meanwhile, at this level, there is another problem. As the affiliates of TNC implement policies of the parent enterprise, it is necessary to take into account the impact of the legislation of the country where they are based. So national legislation of receiving countries regulate operation of TNC, not making much distinction between TNC and national companies. National companies make attempts to extend the application of domestic legislation to the company offices abroad.

Thus, there are problems of domestic regulation of TNC, firstly, the desire of TNC to extend domestic law to overseas affiliates and secondly, insufficiency of national legislation of receiving countries.

The second level of regulation is bilateral investment agreements concluded between the countries.

In addition, it should be emphasized that the specific nature of TNC complicates supervision by separate countries or groups of countries. Today, no country can claim that it has jurisdiction over all parts of the same transnational company overall. It is therefore evident that the effective management of the operation of transnational corporations requires joint action by all countries.

Finally, the third level of regulation of TNC is the multilateral treaties, which can be universal, regional and sub-regional, depending on the number of participating countries [10].

In practice, a parent enterprise controls its affiliates in the following ways:

- prevailing equity capital stake. In foreign affiliates of TNC the parent company's share is more than 10% of the shares or their equivalent;

- Possession of the necessary resources (technology, natural resources, etc.);

- The appointment of staff in key positions;

- Information (marketing, science and technology, etc.);

- Special arrangements, such as sale market guarantee;

- Informal mechanisms [11].

Legal regulation of TNC is at the national level of the country of placement. But it should be taken into account that TNC is alliance of legal entities of different countries, and they are endowed with legal personality under the laws of different countries. Consequently, the TNC cannot be the object of the regulation of certain national legislation, neither where the parent company and the headquarters are nor where affiliates and branches of TNC are. On this basis, concept of legal regulation of TNC should be carried out not only on the national but also international level. TNC should be considered not just as an ordinary commercial enterprise, but a special kind of international institution, if not legally but in fact, have the same power as a country does.

International regulation of TNC as special institutions is only possible because of the specific features of the operation of such corporations, while covering several countries. Therefore, there is a need to grant TNC the status of international entities, which will automatically exclude them out of national jurisdiction. But it is impossible, as the international legal entities are those established on the basis of an international treaty or on the basis of national legislation adopted in accordance with the international agreement. The two do not meet the criteria for TNC, therefore, cannot have the status of an international legal entity.

If national legislation is insufficient and international standards cannot be applied to regulate the operation of transnational corporations, it is worthwhile to establish the third legal system, along with international and domestic law, for example, the international transnational law. The theory of this branch of law already exists. The meaning of the concept of transnational law, according to a famous lawyer on international relations Shumilova V.M., is that the parties of international relations regulate their norms of behavior that are beyond the scope of domestic law and not covered by domestic or international law. Because of the international nature of TNC it is appropriate to regulate operation of TNC on the international level, which will have a number of advantages [12].

The draft Code of Conduct for TNC has been worked out in the United Nations for a quarter century but not adopted yet. Taking legal and procedural steps to adopt the Code of Conduct on Transnational Corporations of the United Nations has failed in the 1980s.

In the 1999 "Global Compact", the Secretary General of the United Nations has a different view. This "Agreement" is not a legal document or a regulatory Code of Conduct, but a platform based on a common set of values and designed to promote the exchange of institutional knowledge.

This "Agreement" is the basis for improving interaction between TNC and receiving countries by means of transparency and dialogue to find out and extend practice based on universal principles.

This "Agreement" includes nine principles drawn from the Universal Declaration of Human Rights, the Declaration of Fundamental Principles and Rights, ILO Employment, and the Declaration of Environment and Development, comprising the Rio de Janeiro principles. In this "Agreement", companies are encouraged to adopt these principles in their corporate areas. Agreement " also encourages efforts to increase the contribution of FDI development [13].

Today, TNC control one third of the world industrial production and give one third of world exports. The main part of TNC and investments are owned by the U.S., EU and Japan.

The leaders of the world's capital markets are the U.S., UK, Japan, Germany, France and other EU countries, Canada, Hong Kong, Australia, Taiwan [14].

A strong base to oppose financial and economic shocks is formed thanks to TNC. Unique corporate strategies, extending with great success is due to the ability to be a leader on the global stage in the economic and political spheres, the dynamics of innovation, dedication of skilled labour and effective work of the governing bodies.

Giant companies act as a center, a core of a new area of the world post-industrial economy.

However, the impact of TNC on the economy of countries increases quite rapidly, which, of course, leads to the fact that having a huge financial accountability and powerful political support, large corporations are able to dictate terms to competitors in their field, as well as to countries.

Monopolization undeniably has a detrimental effect on any economy, and the only solution, in our point of view, is the work of competition authorities at all levels of the political structure of the world, the adoption of the Code of Conduct for TNC and regulation of operation of large enterprises both at the international and at the national level in order to prevent abuse of the benefits of the industrial giants.

To sum up, taking into account both positive and negative influences of transnational corporations on the world economy in a globalized world, the need to improve the legal regulation of these giants should not be neglected.


1. Ref.: Lockaychuk O.V. Problems of legal regulation of transnational corporations. Siberian Law Bulletin. - 2007. - 1 2. p.22.

2. Ref.: Information service ZAKON.KZ

3. Ref.: Scheglov S.S. Definition of the concept of transnational corporations and premises for the emergence of TNC / / "Lawyer", 2008, 1 3, p.17.

4. Ref.: Vronovskiy A., Wojciech M. Legal regulation of the financial-industrial groups in some of the EU / / Problems of the theory and practice of management. 1999. N 5. S. 42.

5. Ref.: Chub. B.A. Corporate governance: a course / Library "shelf Bookseller" - 227 p.

6. Ref.: International economic law and procedure. G.M. Velyaminov - Moscow: Wolters Kluwer, 2004. 16.1. The concept and objectives of regulation of TNC

7. Ref.: Boguslavskiy M.M. Private International Law: A Textbook. - 2nd ed., Rev. and add. - Moscow Int. Relations, 1994. - 416.

8. Ref.: Micklashevskaya N.A., Kholopov A.V. International Economics: A Textbook. - Moscow: Moscow State M.G. Lomonosova, Publisher "Business and Service", in 1998 - 272.

9. Ref.: [ Private International Law: The manual / Ed. G.K. Dmitriyeva. Moscow, 1993. p.83

10. Ref.: Lockaychuk O.V. Problems of legal regulation of transnational corporations / / Siberian Law Journal. - 2007. - 1 2.

11. Ref.: The World Economy: Textbook. Aid for higher education /. Ed. prof. A.S. Bulatov. - Moscow: Yurist, 2003. (P. 182)

12. Ref.: Romaniuk E.I. Malova A.Yu. The problem of the legal status of transnational corporations / Ukraine /

13. Ref.: Technical Note number 7: "Existing proposals on bilateral and multilateral investment agreements and practices on codes of conduct for transnational corporations and governments with regard to foreign direct investment," the UN General Assembly / /

14. Ref.: V. Sysoyev, Abramenko V. Recent trends in the development and management of TNC // Problems of Economics. - 2003. - 1 2, 1 5 - 112 p.

Table of contents: The Kazakh-American Free University Academic Journal №4 - 2012

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