3.1 DEVELOPMENT
GLOBALISATION 2:
TRANSNATIONAL CORPORATIONS
SYLLABUS CONTENT
• Describe and explain the process of globalisation,
and consider its impacts.
• The role of technology and transnational corporations in
globalisation along with economic factors which give rise to
globalisation;
• Impacts at a local, national and global scale.
• Case study required:
• A transnational corporation and its global links.
IMPORTANT TERMS
• Transnational Corporation
• A TNC is an enterprise that manages production or delivers services in
more than one country.
• Foreign Direct Investment (FDI)
• an investment made by a company or individual from one country in
business interests in another country, in the form of either establishing
business operations or acquiring business assets in the other country,
such as ownership or controlling interest in a foreign company.
• Globalisation
• the increasing interconnectedness and interdependence of the world,
economically, culturally and politically. TNCs are the main drivers of
globalisation in the world.
• Multiplier Effect
• The additional economic effects experienced when money is spread
through a community.
IMPORTANT TERMS
• Brand
• a distinguished name and/ or symbol intended to identify a
product or producer.
• Consumer Culture
• the equation of personal happiness with consumption and
the purchase of material possessions.
• Mass Media
• a section of the media specifically designed to reach a
large audience. The term was coined in the 1920s with the
advent of nationwide radio networks, and mass circulation
newspapers and magazines.
WHAT IS A TRANSNATIONAL
CORPORATION?
• Transnational corporations (TNCs) are companies or
firms with factories and offices in many different
countries.
• They are also called Multinational corporations
(MNCs).
• In reality they are different – a TNC is an MNC that
operates worldwide without being identified with a
national home base.
• For IGCSE exams we are not concerned with the
distinctions between the two, however, we should
use the term “TNC” as stated in the syllabus.
CHARACTERISTICS OF A TNC
• They are characterized as business entities that
have their management headquarters in one
country, known as the home country, and operate
in several other countries, known as host countries.
• Industries like manufacturing, oil mining, agriculture,
consulting,
accounting,
construction,
legal,
advertising,
entertainment,
banking,
telecommunications and lodging are often run
through TNC’s.
CHARACTERISTICS OF A TNC
• TNCs maintain various bases all over the world, many of
which are owned by a mixture of domestic and foreign
stock holders.
• Most TNC’s are massive, with budgets that outweigh
smaller nations’ GDPs.
• In 2016 the 10 largest TNCs had revenues of $2.9 trillion.
There are only 4 countries in the world with higher GDPs
than this.
• The 100 largest TNCs therefore, represent a significant
proportion of total global production.
• Thus, they are highly influential to globalization,
economic and environmental lobbying in most
countries.
THE WORLD’S 10 LARGEST TNCS, 2016
Rank
Company
Revenue
($ billion)
Profit
($ billion)
HQ
Country
1
Wal-Mart
482.1
14.78
U.S.A.
2
State Grid Corporation
329.6
10.2
China
3
China National Petroleum
299.3
7.1
China
4
Sinopec Group
294.4
3.6
China
5
Royal Dutch Shell
272.2
1.9
Netherlands
6
Exxon Mobil
246.2
16.28
U.S.A.
7
Volkswagen
236.6
- 1.5
Germany
8
Toyota
236.6
19.3
Japan
9
Apple
233.7
53.78
U.S.A.
10
BP
226
- 6.5
Britain
IMPORTANCE OF TRANSNATIONAL
CORPORATIONS
• TNCs and nation states (countries) are the two main
elements of the global economy.
• The governments of countries individually and
collectively set the rules for the global economy,
but the bulk of investment is through TNCs which are
the main drivers of ‘global shift’.
• Under this process manufacturing industry at first
and more recently services have relocated in
significant numbers from developed countries to
selected developing countries as TNCs have taken
advantage of lower labour costs and other ways to
reduce costs.
IMPORTANCE OF TRANSNATIONAL
CORPORATIONS
• It is this process that has resulted in the emergence
of an increasing number of newly industrialised
countries (NICs) since the 1960s.
• The development of successive generations of
newly industrialised countries is the major success
story of globalisation.
4 GENERATIONS OF NICS
IMPORTANCE OF TRANSNATIONAL
CORPORATIONS
• Twenty years ago the vast majority of the world’s TNCs
had their headquarters in North America, Western
Europe and Japan.
• However, over the last two decades the emerging
economies of the newly industrialised countries such as
South Korea, China and India have been accounting for
an increasing slice of the global economy.
• Much of this economic growth has been achieved
through the expansion of their own most important
companies, first domestically (as national corporations)
and more recently on an international basis (as TNCs).
IMPORTANCE OF TRANSNATIONAL
CORPORATIONS
• TNCs have a huge impact on the global economy
in general and the countries in which they choose
to locate in particular.
• They play a major role in world trade in terms of
what and where they buy and sell and a
considerable proportion of world trade is intra-firm,
taking place within TNCs.
WHY DO NATIONAL/DOMESTIC FIRMS
BECOME TNCS?
• We have already seen that the world’s largest
companies may have started as national firms but are
now transnational corporations which operate in many
countries.
• Not only are the markets for goods and services global,
but also many businesses have set up offices, shops and
factories in other countries, usually LEDCs, because:
• they pay lower wages in LEDCs since the standard of living is
much lower;
• operating costs are lower since laws protecting workers’ safety
and the natural environment are less strict.
• When companies based in MEDCs move factories and
jobs to LEDCs, this is called outsourcing.
WHY HAVE TNCS BECOME SO
SUCCESSFUL?
• The spread of a global consumer culture has been
important to the success of many TNCs and mass
media have been used very effectively to
encourage consumers to ‘want’ more than they
‘need’.
• The power of brands and their global marketing
strategies cannot be underestimated, especially in
food, beverages and fashion.
WHY HAVE TNCS BECOME SO
SUCCESSFUL?
• Because of their influence, countries and regional
political districts at times tender incentives to TNCs
in form of:
• tax breaks,
• pledges of governmental assistance or improved
infrastructure,
• political favors and lenient environmental and labor
standards enforcement
• So as to be
competitors.
at
an
advantage
from
their
WHY HAVE TNCS BECOME SO
SUCCESSFUL?
• Also, due to their size, they can have a significant
impact on government policy, primarily through the
threat of market withdrawal.
• They are powerful enough to initiate lobbying that is
directed at a variety of business concerns such as
tariff structures, aiming to restrict competition of
foreign industries.
POSITIVE EFFECTS OF TNCS ON
ECONOMIC DEVELOPMENT
• Investment by TNCs in a
country, such as building
factories, helps create
jobs for local people.
• TNCs usually pay higher
wages
than
local
businesses which means
that employees have a
higher income and better
standard of living.
• Local people learn new
skills and how to make
use of new technologies.
• TNCs bring wealth to the
local economy which has
a positive multiplier effect
on other local businesses.
• Most of the products
manufactured by TNCs
are
exported
which
benefits the economy of
the country.
• TNCs pay tax to the
government of the host
country. This money can
be invested in health,
education
and
infrastructure.
NEGATIVE EFFECTS OF TNCS ON
ECONOMIC DEVELOPMENT
• TNCs have a reputation for
making employees work long
hours
in
poor
working
conditions.
• Often profits made by the TNC
are sent back to the MEDC
where the company has its HQ,
rather than benefitting the
local economy.
• TNCs can clos factories and
transfer production to other
low-cost locations overseas
with
little
warning.
Local
people are made redundant
which
brings
a
negative
multiplier effect to the local
area. E.g. see Nokia opposite.
• There are fewer laws about pollution in
many LEDCs. This may lead to many
TNCs polluting the environment without
danger or prosecution.
• TNCs become so important to the
economy of the host country that the
country becomes too dependent on the
TNC. As a result, the TNC may be able to
influence decisions made by the
government.
• Manufacturing jobs in MEDCs have
reduced and many people are left
unemployed as TNCs move their
factories abroad. E.g. when Dyson
moved its plant from Wiltshire to
Malaysia in 2002, it cost 800 jobs in the
UK. Similarly when Nokia shifted
manufacturing to Asia in 2012, 4000 jobs
were lost in Finland, Hungary and
Mexico.