Transnational Corporations

A transnational corporation (TNC) is a large business organisation that operates and has ownership of assets in more than one country. TNCs are responsible for a large percentage of total world employment, production and trade and are therefore the major contributor to Foreign Direct Investment (FDI), equipment and property that is owned by businesses outside their home country.

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There are about 37,000 major TNCs. They have been changing rapidly by expanding through mergers and takeovers and have become ‘the powerful players in the global village’. In the 1960s transnational companies accounted for 17% of the worlds Gross Domestic Product, but by 1995 it had reached 32%.

TNCs therefore wield huge economic, financial and political power an their activities affect the entire society of a particular country. He supporters of TNCs suggest that they are responsible for fuelling development and bringing prosperity to millions. Some say they wield far too much economic, political and social power, that they may carelessly exploit workers and that they introduce values and desires that, in non-western countries in particular have harmful and moral effects.

Growth of TNCs has occurred because global markets exist for many products and services and those organisations with sufficient capital and expertise have establishes branches in new countries. They usually establish overseas markets in order to gain: access to new markets in which they might see a profitable; extend any existing markets to match competitors; provide platforms for exports as they may find it cheaper to go to the customers instead of paying large delivery cost or to attract customers as they will also save costs, e.g. Japanese electronic and automotive industry. By actually doing this they will avoid trade barriers and be able increase sales in foreign countries; products will be more diversified; costs of production will be reduced e.g. access to cheap labour. Finally economies of scale will be exploited in order to out-compete smaller national, regional and local manufacturers.

This is accelerated by cheap and efficient global communication networks which have allowed organizations to control the activities of dozens of affiliates through one head office which is usually in a developed country, where management, marketing and research and development is concentrated. TNCs have achieved vertical integration where a business buys its suppliers or customers in order to increase control over them. When any particular organisations customers or suppliers are in another country, then this organisation will automatically become a TNC.

In the last 30 years, globalisation has led to a relative shift of manufacturing from North America, Europe, Japan to LEDCs in Asia and Latin America. This is likely to continue. By 2005 it is likely that almost one in three jobs in manufacturing industry will be in LEDCs. The huge growth in inward investment by Taiwanese firms in East and South-East Asia between 1986 and 1997 is an example of the global shift. This growth has been fuelled by the liberalisation of the Chinese economy in the 1990s, pro-market reforms and low labour costs throughout the region.

There are two main reasons why firms produce globally. Firstly, because by locating overseas they can get round trade barriers such as tariffs, quotas and voluntary agreements which protect home markets and secondly because production over seas often lower costs. TNCs main gain access to cheaper labour and materials, and operate in an environment with fewer and less stringent pollution controls. However on the lines of the locational theory, there is little evidence to suggest that large firms locate close to overseas markets to reduce their transport costs, but in the long run it probably does.

TNCs have to choose the most suitable location in order to make the most out of their investment. Between 1950 and 1970, the number of TNCs increased rapidly and it was usually the existence of a valuable natural resource that attracted their attentions. One of the most important reasons why a TNC will become established in a new country is the level of incentives offered by the home government. Some countries really encourage inward investment because they believe it will help their economy and further develop their country.

The choice of a particular country for investment often centres on political factors. Governments are usually keen to encourage inward investment. It not only creates jobs, it boosts exports that help to balance a countries trade. Competition between countries to attract investment is often intense. Most governments offer a package of financial inducements to TNCs. TNCs often have the power to trade of one company against another in order to get the best deal.

In South East Asia, host countries developed export processing zones within which goods were imported cheaply, infrastructure was provided and the normal restrictions concerning foreign ownership of national assets was ignored. For example, many US TNCs have established themselves in the border industrial zone in Mexico to take advantage of cheap labour, lack of import duties and their proximity to the home country.

There have been a number of trends that have emerged since 1980’s. Firstly there has been an increase in cross investment, where an increasing tendency for those countries which have there own TNCs to also be the destination country for other countries TNCs. Secondly, there is an increasing number of foreign TNCs that use the United States as a host country. The US remains the single largest recipient of foreign direct investment (FDI) in the world.

After the US, China is the second largest recipient of FDI in the world and the largest among the developing world. Initially, TNCs attracted to China concentrated on labour intensive manufacturing industries, but in recent years TNCs such as Mitsui, Siemens, Coca Cola, IBM, and Volkswagen have begun to concentrate an increasing percentage of their investment on capital intensive and technological intensive industries, the service sector and on infrastructure projects.

Another example is TNCs in Bangladesh. TNCs such as Daewoo have been attracted to Bangladesh because of low wage rates compared to other Asian countries and ‘spare’ quotas to supply ready-made clothes to the European union and to the US.

Countries often choose these countries in order to maximise their spatial profit margins. This takes into account both revenue and costs. Costs are made up of production cost (wages and rent) and transport costs. Spatial profit margins do not assume that a firm automatically chooses the optimal location. It states that a firm must locate somewhere within the spatial margins of profitability. The exact location may depend on the knowledge, ability and goals of decision makers. Either way the location chosen will be almost certainly sub optimal.

This is why the growth of TNCs is so rapid in the locations that are chosen which, are beneficial to the company and to the host country that has been chosen.