3.10.2 Globalization of economic activity Integration of world economic activity - TNCs Understand that world economic activity is increasingly integrated because of growing international trade, the growth of transnational corporations (TNCs), Be familiar with the evidence of the growth of each of these global economic integration factors.
What is a TNC?
A transnational corporation is a company that operates in at least two countries
Its organisation is hierarchical with the headquarters and research and development often located in the home country .
Centres of production tends to be overseas
As the organisation becomes more global regional headquarters and regional R&D will develop in the manufacturing areas
Especially in the mining sector for resources such as oil and gas
Royal Dutch Shell
Scientific instruments, microelectronics and pharmaceuticals
Sony, mitsubishi, Glaxo-SmithKleine
Large volume consumer goods e.g. motor vehicles, tyres, televisions and other electrical goods
Toyota, General Motors, Ford Volkwagen Daimler
3 . Mass produced consumer goods
cigarettes, drinks, breakfast cereals, cosmetics and branded goods
Mars, Nestle, Unlever, Kraft foods
4. Service operations Banking / insurance, advertising, freight transport, hotel chains and fast food outlets ING group, Citigroup, AXA, HABC, Dexia, Allianz
TNCs control and coordinate economic activities in different countries and develop trade within and between units of the same corporation in different countries. This means they can often control the terms of trade and can reduce the effect of quota restrictions on the movement of goods ( bypass trade tariffs ).
Advantages to TNCs
They are able to take advantage of spatial differences in factors of production
They can exploit differences in the availability of capital, labour and land or building costs.
e.g. 2002 Dyson moved its production from a plant in Malmesbury, Wiltshire to Malaysia to take advantage of cheaper labour. Dyson did retain several hundred jobs in Wiltshire for R&D Saving of 30% in production costs
They can locate to take advantage of government policies such as lower taxes, subsidies and grants and less strict legislation on employment and pollution.
They can get round trade barriers by locating production within the markets where they want to sell. E.g. Nissan in Sunderland, Toyota in Derby.
Japanese car firms have been attracted to locations in the EU because of quota restrictions on the import of Japanese made vehicles into Europe. By producing within Europe they are considered to be European manufacturers and gain entry to the European market
Consists of two car assembly plants and an engine plant
2008 employed more than 4,000 workers (most on production lines) producing over 200 000 vehicles annually, mainly for the European market with some exports to the middle east, Africa, North America.
2008 / 9 recession – Honda laid off workers and closed the plant for some periods
TNCs have geographical flexibility and can shift resources and production between locations at a global scale in order to maximise profit .
The large size and scale of TNCs allows them to achieve economies of scale – reducing costs, finance new investment and compete in world markets.
Large companies also have a wider choice when locating a new plant although governments may try to influence decisions as part of regional policy or a desire to protect home markets,
Governments are keen to attract TNCs because inward investment creates jobs and boosts profit which assists the trade balance
TNCs have the power to trade off one country against another to achieve the best deal
Within a country TNCs have the financial resources to research several potential sites
take advantage of the best communications
access to labour
low cost of land and building
TNCs and globalisation
TNCs serve a global market and they can globalise their manufacturing operations in several ways:
By producing just for the country in which the plant is situated
By producing for a number of countries e.g. the Honda car plant
By integrating production so that each plant performs a separate part of a process. Linkage takes place across national boundaries in a chain sequence (vertical integration) or components are moved to a final assembly plant in one country (horizontal linkage)
TNCs often locate in areas of industrial concentration – or their presence may encourage industries to concentrate in an area. A factor promoting this is external economies of scale or agglomeration economies
Localisation economies – occur when firms linked by the purchase of materials and finished goods locate close together. This reduces transport costs between suppliers and customers leading to faster delivery times and allow better communication and personal contact between firms (monitoring and maintaining quality)
Urbanisation economies – cost savings result from an urban location enabling linkages to develop between manufacturing and services. In some cases it is cheaper for manufacturing plants to contract work to specialist companies, Savings also result from the economic and social infrastructure of the area that exists before the arrival of new companies.
A growing number of the world’s largest TNCs are in the service sector.
Of the world’s 20 largest companies in 2007, 6 were service providers – three banks (citigroup, HSBC, Dexia) and three insurance groups (ING group, AXA, Allianz)
The ICT revolution has opened up overseas investment in tradeable services as information can now be sent across the world at little cost..
Services can be split into components each of which can be located in countries that are able to provide them most efficiently and cost effectively.
IT services are increasingly globalising in the same way that manufacturing has been for several decades.
Positive impact on host country
Foreign direct investment ( FDI ) in its classic form is defined as a company from one country making a physical investment into building a factory in another country
Employment – UK 2007, FDI generated more than 700 project which created over 50 000 jobs. This has a significant effect on local communities
Multiplier effects – at a local level such investment can trigger more employment through cumulative causation bringing wealth into the local economy. The location of a TNC in a region has the potential to create jobs in:
Companies that supply components to the plant
Companies that distribute goods from the new plant
Companies that supply services to the new plant from servicing plant machinery to supplying the canteen.
The arrival of a TNC can inject capital into the local economy in the form of wages. More disposable income in the area will create a demand for more housing, transport and services.
New methods of working – TNCs may introduce new methods of working. Quality management systems which monitor the standard of output in supplier firms and Just in time component supply.
They transfer technology to the host country creating a more skilled workforce. They may also create more opportunities for female employment in low skilled manufacturing jobs, particularly in developing countries.
– TNCs may be in direct competition with local firms which may be less efficient and so lose business and ultimately employees
– TNCs may cause damage to air water or land. Many developing countries have less strict pollution laws than those in the developed world. Agricultural land may be lost along with wildlife habitats
– it has been alleged that some TNCs exploit cheap, flexible non-unionised labour forces in developing countries. Many large TNCs establish a basic standard of operation which includes training facilities for workers and providing promotion opportunities for host country employees and minimum wage and age limits.
– establishment of a TNC in a city in LEDC encourages urbanisation. Young migrant workers flock to the city. This has a knock on effect in rural communities.
Removal of capital
Capital generated by TNCs does not all stay in the host country
Outside decision making
Decisions on whether or not plants stay open in other countries are made by the head office of the TNC. Decisions are made in the best interest of the TNC and its level of profitability
Impacts on country of origin
If TNCs transfer production overseas there can be a negative economic impact on the country of origin
Employment – both in that company and in supliers.
The amount of disposable income within the region will increase leading to a downward spiral.
Traditional industrial regions that rely on one or two industries for their economic base can be hit hard
Dyson moved from Malmsebury to Malaysia -800 UK jobs
Kenwood move production of Chef food mixer to China
Clarkes shoe production moved to Romania
Black & Decker moved from Spennymoor to Czech Republic
Service companies can also be moved abroad – e.g. British Airways, Prudential, HSBC, Barclays, Aviva have call centres and back office functions in countries – e.g. India where wage levels are much lower.
Higher salaried jobs often stay in the country of origin
TNCs that move for cheap labour usually increase their profitability which benefits the host country as profits are returned for distribution to share holders .
Government revenues from company taxation are also increased .
2004 – the total revenue earned by UK companies overseas = £63.8 billion
Case Study - Unilever
Operates in two main product areas:
Food and beverages : include brands …
Ben and Jerry’s, Blue Band, Bovril, Colman’s, Flora, Hellmann’s, Knorr, Lipton, Marmite, PG Tips, Walls, Pot Noodle
Created in 1930 by the merger of the UK soap maker Lever brothers and the Dutch margarine producer Margarine Unie.
Both companies used palm oil as a major ingredient in their products and there were economies of scale to be had through the larger organisation.
Both were involved in the large scale marketing of household products
Both used similar distribution channels
In 2008 the company had over 300 manufacturing sites in more than 100 countries across every continent
It employed more than 170, 000 people
Had an annual company revenue of over $50 billion in 2007
R&D – Unilever has several centres of this, two are located in the UK, one in Netherlands, India, USA and China
Company has HQ in both London and Rotterdam
Unilvever has attracted criticism from political activists and environmental groups.
Issues raised – testing products on animals,
Using child labour
Allegations have been denied by the company.
April 2008 Greenpeace activists targeted the company protesting about the removal of Indonesian rainforest to make way for palm oil production which has seriously reduced the habitat of the orang-utan
Unilever maintains that it is leading research into the problem and will attempt to deal only with suppliers who guarantee sustainable practices in palm oil production.
Ape protest at Unilever factory
McDonalds According to the McDonald's Corporation website (as of January 30, 2007), McDonald's has, "More than 30,000 local restaurants serving nearly 50 million people in more than 119 countries each day."
Mcdonalds Restaurants According to the McDonald's Corporation website (as of January 30, 2007), McDonald's has, "More than 30,000 local restaurants serving nearly 50 million people in more than 119 countries each day."
Global challenges, Bob Digby
Heinemann pg 219- 229
Geog An Integrated Approach, Waugh
Nelson Thornes pg 572-4
Globalisation Paul Guinness
Hodder and Stoughton pg 81 – 102
Philip Allen Updates pg 209-18
i) Describe the changes in the number of McDonald’s restaurants shown on the graph. [2 marks]
(ii) Explain the current distribution of McDonald’s restaurants. [3 marks]
(iii) Examine the reasons for the global spread of transnational corporations. [5 marks]
(iv) To what extent do transnational corporations benefit LEDCs? [10 marks]
Choose a TNC. The TNC should be in the manufacturing or service sector. Check that you can find enough information to fulfil the requirements below.
Produce a short summary of the companies interests, products etc.
Outline the history and growth of the company - especially through the initial stages of globalisation.
Detail the production of one of the company’s products (the most important/well known product?). Which countries are involved?
Does the company operate within LEDCs? If so does it have policies about the use of labour, resources, pricing etc.?
Detail the global market of the company? Which countries are involved? Are any countries not sold to? If so, why?
The graph shows an exponential increase in the number of restaurants [1 mark] . Award [1 mark] for quantification.
Explain the current distribution of McDonald’s restaurants. [3 marks]
The pattern is closely linked to levels of population concentration and affluence with MEDCs dominant and the poorest regions such as the majority of Africa excluded [2 marks] . A further [1 mark] should be awarded for further expansion or any other valid point.
Examine the reasons for the global spread of transnational corporations .
The reasons include technological advances in transport (containerization, bulk carriers and air freight) and developments in satellite communication and the Internet . All of these facilitate business transactions and the flow of investment, information, goods and people . The New International Division of Labour, access to new resources and growing markets are other incentives for TNCs to distribute their operations globally and maximize profits. For a maximum of [5 marks] five developed reasons could be given, or fewer reasons in greater depth .
To what extent do transnational corporations benefit LEDCs?
The benefits include employment opportunities, improved technology, improved business expertise and linguistic skills, infrastructural development, financial support and taxes, inward investment, improved national balance of payments and local economic growth through the multiplier effect.
The drawbacks include: exploitation of the local labour force, foreign instead of local decision-making, leakage of profits back to the country of origin, redirection of local funds and grants towards TNCs, poor health and safety standards, competition with local industries, increased urbanization leading to overcrowding, and undesirable changes in culture and consumption levels. Responses may also recognize that TNCs can originate in LEDCs.
A very good response would address the benefits and drawbacks covering several of the points given, but the treatment of one may be more detailed than the other. A balanced argument is likely to be credited at band D or above.
Write a report on the importance of transnational corporations (TNCs) and newly industrialising countries (NICs) in the changing global economy.
In your report:
outline the reasons for the growth of TNCs in the world;
describe the social and economic impacts of TNCs on countries in the world, including
discuss the importance of TNCs and NICs in the changing global economy. (25 marks)
AQA B 2006
The reasons for the growth of TNCs:
TNCs are able to control or co-ordinate economic activities in different countries and can develop intra-firm trade within and between units of the same corporation in two countries. In this way the TNC has control over terms of trade and can reduce the effects of quota restrictions on the movement of goods.
TNCs have the ability to take advantage of spatial differences in factors of production and government policies at the global scale. They can exploit differences in the availability of capital, labour costs and land and building costs; they can take advantage of cheaper labour in less developed economies.
TNCs can also take advantage of different government policies; tax levels, subsidies/grants, environmental controls (less strict in some countries) and can get round trade barriers by locating in the ‘market’ economy.
TNCs have geographical flexibility and can shift resources and production between locations at the global scale to maximise profits.
TNCs may have a variety of impacts on a host country in MEDC and/or LEDC :
• They provide employment and thereby raise living standards
• They improve the level of skills and expertise within a country
• They cause foreign currency to be brought into a country, improving the balance of payments
• They cause a multiplier effect, increasing economic activity
• They encourage a transfer of technology into the country
• Many of the jobs are low skilled
• Managerial positions tend to be brought in rather than developed locally
• Most of profits are sent back to home country
• Corners are often cut in terms of health and safety
• They exert political muscle
• Globalisation of decision making sometimes leads to short term investment, and the TNC may pull out at short notice.
Impacts within the country of origin
The development of managerial and research skills
There will be a general rise in income levels – the whole nation will benefit from overseas investments; greater desire to invest in overseas operations
Wider share ownership – individuals, and corporate groupings more willing to become involved in foreign investments.
NICs are the countries which have seen the most rapid economic growth in recent years. Originally, they attracted manufacturing industry due to their low labour costs, expanding domestic markets, available raw materials, reduced import and export tariffs, and weaker planning legislation. They began to dominate manufacturing in electrical goods, textiles and clothing, shipbuilding, and increasingly have moved into car assembly. Many of the industries were of a low skill basis, with low technology but high labour input.
In more recent years, the NICs have developed into countries of origin of TNCs, and have invested in both MEDCs and in other LEDCs. Examples of such companies include the Korean firms Samsung, and Daewoo. This is due to increased profits from inward investment by TNCs from MEDCs over the last 30 years. To remain profitable they have been forced to invest in areas of cheaper labour costs than themselves (Malaysia produces 10% of the world’s TVs), to gain near access to protected markets (e.g. Daewoo assembling cars in Romania), and to access virgin markets (S. America).
NICs/TNCs have also become involved in service industries – e.g. call centre work in India. Candidates may also refer to the economic and financial problems that occurred in recent years in the Far East, with their knock-on effects elsewhere in the world.