Transnational Corporations

Defining Transnational Corporations (TNCs)

A Transnational Corporation (TNC) is a business organisation with a global reach and presence in at least two countries. The UN defines Transnational’s as companies operating in more than one country. In particular, it is a means of coordinating between one centre of strategic decision-making (HQ) and production in at least two countries. Multi-Nationals are defined as Corporations with operation in many countries.

The organisa­tion tends to be hierarchical; often the headquarters and Research and Development (R&D) are in the home country with branch production plants or service outlets overseas (host country). The home country is either a MEDCs or NICs whereas the host country are based in a full range of countries. Regional headquarters and R&D may develop in host countries as the company becomes more globalised. Examples of TNCs include IBM, Sony, Philips, Nike, Ford, Nissan and Nestle.

 

Company	Revenue ($M)
1.Wal-Mart Stores	219,812
2.Exxon Mobil	191,581
3.General Motors	177,260
4.BP	174,218
5.Ford Motor	162,412
6.Enron	138,412
7.Daimler Chrysler	136,897
8.Royal Dutch/Shell Group	135,211
9.General Electric	125,913
10.Toyota Motor	120,814
11.Citigroup	112,022
12.Mitsubishi	105,814

 

 

 

 

 

 

 

 

 

Fig 1: The world's largest corporations 2001 (Source: Fortune) 

Most of the manufacturing takes place in LEDC’s where labour costs, planning and environmental restrictions are lower and are less. E.g. Brazil, Taiwan and China. 

Why are TNCs Important

TNCs are active in almost all economic sectors, especially important in certain activities such as resource extraction, manufacturing (technologically advanced industries, large-volume consumer goods and mass-produced consumer goods), and services (e.g. banking/finance, advertising and fast-food). TNCs are very powerful, politically influential and important creators of wealth with some having annual turnover that are equivalent to some countries total GNP. Expanding through acquisitions, joint ventures and Franchising, most TNCs are from MEDCs, and invest in other MEDCs, some invest in LEDCs and NICs, with LEDCs used for production.

Many of the world’s largest TNCs are found in the service sector, particularly banking, insurance and retailing.  According to the United Nations Conference on Trade and Development (UNCTAD) the ten largest corporations in their field now control: 86% of the telecommunications sector, 85% of the pesticides industry, 70% of the computer industry and 35% of the pharmaceuticals industry.

The reasons for the growth of TNCs in various parts of the world

The major advantage of their large size and scale of operation is that they can achieve economies of scale, allowing them to reduce costs, finance new investment and compete in world markets. TNCs can control or coordinate economic activities in different countries and develop trade within and between units of the same corporation in different countries.
They can take advantage of cheaper labour in less developed economies, exploit differences in the availability of capital, labour costs, land and building costs and less strict environmental controls. The host country may have lower tax levels and government policies, such as grants and subsidies. Currency differences create a more competitive product and the TNC may get around trade barriers by locating in the market economy.

TNCs have geographical flexibility and can shift resources and production between locations at a global scale to maximise profits. The global corporation therefore has a very important role in linking economies at different scales; globally, regionally (within a continental area), nationally and locally.

Social and Economic impacts of TNCs

Inward investment by TNCs can have significant positive effects upon social and economic developments within the host country, at both a national scale and a local/regional scale.

·         Advantages on the host country

The injection of capital in an area will stimulate the local economy, perhaps reducing local unemployment by direct employment, industrial linkages (as firms that supply components will increase their business and may add to their workforce) and local logistics companies that distribute their products. This in turn through cumulative causation creates a demand for more housing, transport and services. Creating an upward spiral in economic terms and therefore raising the standards of living with a subsequent drop in poverty levels. Furthermore, greater opportunities for female employment may develop through the introduction of low-skilled manufacturing jobs.
Other benefits which may benefit the host country include development of infrastructure and communications and the introduction of new methods of working in their plant and their supply companies (e.g. the operation of quality management systems). The TNCs global network creates connections that tie local and national economies into the global economic system.

·         Disadvantages on the host country

Local companies in direct competition with the new company may suffer and lose business and employees. To safeguard domestic firms, governments negotiate a local content element of the final product; consequently, the TNC agrees to work towards an agreed percentage of components being supplied from the host country. (In the UK this is 60%).

If the TNC has located in an LEDC this could lead to urbanisation where the removal of young workers creates a declining or aging population in rural areas. TNCs may also bring unwelcome environmental changes from increased air and water pollution or the loss of habitat for wildlife from land being given over to build the plants and houses. Local cultures and traditions can be eroded by brands and western ideas, causing a loss of identity.

TNCs have often been criticised for exploiting cheap, flexible un-unionised workforces by paying very low wages in sweatshop conditions. If trade unions do have a presence they welcome the additional jobs but fear a loss of influence if the new firm adopts a single-union approach. In some instances there may be an increased social gap between those in work and those not. The TNC may pat little or no taxes, there will be a removal of capital and outside decision making, ensuring that economic wealth remains in the country of origin. TNCs may make short-term investment and pull out at short notice.

·          Advantages on the country of origin

High Salary Employment remains in their own country with the Headquarters and R&D. Profits are returned to the home country which is also taxed from the government, increasing government revenues and environmental pollution is transferred abroad.

·         Disadvantages on country of origin.

Abandoned production will result in derelict land, unemployment for direct employees and their suppliers. The reverse multiplier effect from unemployment creates a fall in disposable income which effects other sectors. Outsourcing of TNCs may be unpopular, getting negative news coverage, leading to a fall in sales.

 

Possible teaching activities: -

·         Getting the pupils to complete a Google search to find out the most up-to-date list of the top five largest global corporations. Maybe five facts about one company.

·         Presentations on the economic, social and environmental costs and benefits of MNC/TNC in one LEDC country or region.

·         Develop critical thinking by asking them to complete a cost-benefit analysis of the socio-economic impacts. Possibly getting more able or those at A-Level to complete without giving as much info as there is here. Possibly the cost-benefit analysis could be for a named TNC.