Account for the growth of TNCs and evaluate their impacts at the global and national scales (40 marks)
A TNC (transnational corporation) is a company that operates in no less than two countries and has a global outlook. TNCs have a long history going back to the 16th Century in terms of trade such as spices, but it’s not until C. 1945 that companies started to form acquisitions and mergers. The one key reason why these businesses have been so successful in their area of expertise globally is because they can take advantage of spatial differences in the factors of production worldwide. They are able to exploit differences in the availability of capital, labour costs and land cost, which we as a world have seen, especially in far-east Asia.
An example of a multinational company is Coca-Cola – a soft drinks manufacturer who is situated in Atlanta Georgia, USA where their headquarters are located. Coca-Cola is probably the best-known brand symbol in the world, and because of this has been very successful in branching out to over 200 counties. The expansion of Coca-Cola overseas took place in 1923 and ever since then the company’s presence worldwide has grown rapidly, and year after year, Coca-Cola found a home in more and more places: Cambodia, Montserrat, Paraguay, Macau, Turkey and more. Other TNCs include Vedanta Resources PLC in Orissa India; the Indian businessman, Aril Agarwal, founded it. He started his business 30 years ago in Mumbai, collecting and reselling scrap metal, and now it’s a global diversified metals and mining company. And Dyson, the UK company which pioneered the “bagless” vacuum cleaner, has erupted and James Dyson the inventor and founder is now worth an estimated £3bn.
Accounting for the growth of TNCs: their global outlook has increased rapidly over the past 30 years or so; this might be down to numerous reasons. Governments in NIC (newly industrialised countries) have desperately tried to appeal to every wealthy and powerful TNC, and thus have tried to lure them into their countries. These countries and provinces, (many of them Asian), attempted this by devaluing their property prices to extortionately low sums of money in order so the TNC can build factories cheaply. By
building very inexpensively it results in cutting corners and certain regulations that should be kept to very closely in MEDCs, haven’t. However as these counties aren’t fully developed or particularly high up in the Demographic Transition Model (stage 3 usually), these NICs and LEDCs have a relaxed attitude to environmental laws so the TNCs do not have to pay out for expensive treatments for their waste. In addition, labour is especially low-cost, and trade unions are either; not permitted, criminalised or displaced if operating in many Asian countries and provinces. And the amount of “red-tape” in countries like Malaysia, China and Nigeria make it even more inexpensive for TNCs to locate there. But the amount of money paid to workers under minimum wage also saves the TNC money. Coca-Cola pay Nigerian day workers $2.60 per day! And although that may seem exceedingly low, it is actually quite a fair sum compared to what some workers receive in China. Nike workers in China only receive $1.60 and in sweatshops that is even lower – $0.44!
Politics plays an imperative role in the growth of TNCs, and without the negotiation between governments and TNCs this arrangement would not be able to go fourth. Therefore making economies and political trade barriers more lax, allows easier admission for TNCs into foreign markets. TNCs can locate to take advantage of government policies such as lower taxes, subsidies and grants, which is key to growth. They are able to get around trade barriers by locating production within markets where they wish to sell their produce. Toyota for example, a Japanese motor vehicle TNC, have been attracted to locations in the EU because of quota restrictions on the import of Japanese-made vehicles into Europe. By producing vehicles in Europe, they are considered to be European manufacturers and thus gain entry to European markets.
Growth of TNCs is down to geographical flexibility and being able to shift resources and production between locations on a global scale in order to maximise profit margins. For example, Coca Cola Hellenic is leaving Greece; this is so that they don’t lose any more money than they already have done. Athens stock exchange is a lot smaller than it used to be, which has meant the general economic “sickness” in the country depresses prices of all
companies there. So, the company is to move its domicile from Greece to Switzerland and the stock listing from Athens to London. This example perfectly summarises how and why TNCs pack up in certain countries and go on to the next – to make profit, which is what all-multinational companies are out to do, “make a buck.” The growth in TNCs is also the idea of shifting to a more flexible production system, like “JIT” production, which stands for Just-In-Time. This type of production is exactly what it says on the tin, an order is placed with the company and only then do they start making the product, this saves time, space and money, as products are not left in warehouses until an order is placed. This allows for products to be made quickly and efficiently.
In addition, TNCs can take advantage of the advances in technology; communication and transport meaning the process can be dealt with more quickly, easily and cheaply. Plus, many TNCs have adapted their production process and have broken in down, this is what is known as the Division of Labour, devised by the father of modern economics – Adam Smith. It is the specialisation of cooperating individuals who perform specific tasks and roles, thereby creating a system that runs efficiently and at less cost to the firm as everyone is specialised in their specific area. Furthermore, TNCs are growing because many want to achieve economies of scale whereby one manages to produce an increased amount of goods for a cheaper sum. The advantage of becoming able to develop to this stage means aspects of a company’s expenses will tumble; including labour costs, flexibility of location, influence over Governments and access to the very best resources.
Due to their sheer size, TNCs have become and are a powerful influence on both local economies and international ones. TNCs have played and we are continuing to see they play an essential part in globalisation. TNCs control economic activities in different countries and develop trade within the same corporation in these differing places. As a result of this, they are often able to regulate terms of trade and also, lessen the effects of quota restrictions on the movement of goods.
Vedanta Resources PLC is one example of TNC, which has seen rapid growth
after Anil Agarwal established it in 1976. The scrap metal dealership that started in Mumbai is now a multinational company that employs 32,179 (2012) people and had a profit of US$ 1.229 billion (2012). In the chairman’s statement that was released May 16 2013, Anil Agarwal, spoke about how the company has developed over the past 30 years and how it’s still in a strong position in growth markets – “Global growth and commodity demand remains volatile and emerging markets continue to be the key drivers of growth. Vedanta is well positioned to capitalise on emerging market growth with a significant portion of its assets in India and Africa.” This is true as Vedanta is the largest mining and non-ferrous metals company in India and also has mining operations in Zambia. The economic, environmental and regulatory reforms announced in the 1990s led to the formation of many new business prospects. Following a stage of slow growth caused by environmental protests and union problems delaying expansion plans, it has now started to see increased policy reform and further liberalisation. In turn, a persistent and determined drive in this direction will boost India into higher growth, assisting TNCs like Vedanta. India is one of the fastest growing economies in the world with a peak real GDP of 10.09% in 2010, to 5.90% in 20131, and is the 9th biggest economy in the world following the UK, US and China. Vedanta’s growth has been predominantly down to substantial increases in industrial production in India and massive investments in infrastructure from the Government. The TNCs attention on metals and power subdivisions offers them direct benefits from this. Moreover, India is strategically positioned adjacent to other vast growing economies such as China, Southeast Asia like South Korea and Saudi Arabia in the Middle East. The key reason why India has experienced this growth is due to their lax environmental laws and a lack of acts for example the European Convention of Human Rights Act, which entitle humans to certain standards of livings and a minimum wage, unlike India. In comparison to other industrialised nations, India is able to veer round certain standards and thus, Vedanta can has low labour costs yet a large and skilled labour pool, (especially in IT due to US training), including many well-educated professionals, which means Vedanta saves money whilst production remains high, aiding its growth.
Coca-Cola has often been praised for its sharp and cunning business acumen, which is why it has been so successful, however not all good comes from a Transnational Corporation and the same can be said about “Coke.” Coca-Cola manufacturing plants are located worldwide and sold in over 200 countries, but their manufacturing plants are mainly situated in LEDCs and NICs where there are major expansion opportunities such as extortionately cheap labour, weak or no trade unions and lack of minimum wage. Thus, TNCs can pay workers less, increase productivity and so have a bigger budget to look for new factories, buy more resources and grow! In addition, the workers don’t receive extra benefits like they would in MEDCs and are left to pay for their own health insurance out of their miniscule incomes’. TNCs have cleverly thought of a way to save them money if they don’t think economic conditions in the country, where they’re manufacturing, are good enough. Coca-Cola is able to “pull out” of a country and seek better conditions elsewhere e.g. cheaper labour or more lax environmental laws, to maximise their profit because all multinational companies are profit-maximises in the end, and so don’t care about the little man. Although this is good for the big, influential, and powerful TNC, it’s not for the host country where severe impacts will transpire. Especially an LEDC’s economy will suffer if its workforce will mainly employed by the TNC. The 1990s were a time of continued growth for The Coca-Cola Company. The Company’s long association with sports was strengthened during this decade, with on-going support of the Olympic Games, FIFA World Cup football, Rugby World Cup and the National Basketball Association. Coca-Cola classic became the Official Soft Drink of NASCAR racing, connecting the brand with one of the world’s fastest growing and most popular spectator sports. Advertising all over the world in events watched by millions of spectators means the TNCs awareness worldwide increases. By doing this, Coca-Cola have made a lot of allies not just in TNCs but in countries as well. In the past 15 years, Coca-Cola has acquired a new ally – Russia. The Coca-Cola System in Russia – consisting of The Coca?Cola Company and its bottling partner, Coca-Cola Hellenic (CCH) – is one of the country’s largest foreign investors, having invested up to US$1.8 billion to date in the Russian economy. This investment includes the constructing of manufacturing plants and improving the local infrastructure. The Coca-Cola System directly employs more than 10,000 highly qualified
people. Moreover, each job in the Coca-Cola System indirectly generates eight additional jobs in related industries, including a wide range of suppliers and a nationwide network of retailers. Russian companies supply more than 70% of the raw materials necessary to produce and market our beverages. This means they have one of the world’s most powerful countries to help them and give them opportunities for expansion.
Coca-Cola’s exploitation of labour and resources in India is the perfect example of the destructive powers of transnational corporations, and when Coca-Cola began to set up its factories in India many problems occurred shortly after. Once the factories started being built in India, land had to be cleared for the factories, and this resulted in a devastating loss of agricultural land. Since Coca-Cola is a transnational corporation, they definitely have the power to take the land from agricultural workers, taking away their livelihood, and leaving them with no source of income. This caused the agricultural market of India to plummet, and the consumers have become dependent on other transnational corporations to purchase food from. Many farmers have also been driven to suicide because they were unable to make a living with their farmland taken away, and the loss of human lives is probably the greatest tragedy that results from globalisation. The factories set up now had to hire workers to work in their dreadful factories where the working conditions were appalling; many of the workers were forced to work on dangerous assembly lines, where the Coca-Cola products were package. Now that Coca-Cola had its workers to work for them, they intended to keep them in their factories for as long as possible – regardless of the age or gender of the worker. This meant that the child labourers in Coca-Cola factories would not be permitted to attend school, and when the future generation of India is left uneducated, there is a low chance of India stabilising in the future. The lack of women being educated in India also contributes to the inequality between men and women because when a woman cannot be properly educated, it is difficult for her to gain independence, and she will continue to be suppressed in society. The workers that are being forced to work for Coca-Cola are also making very little money, and they are subject to many types of abuse; they are basically slaves for Coca-Cola, but they continue to work for Coca-Cola because it is the only way they can make
money. Coca-Cola continues to exploit the labour in India, and, if this pattern continues, the future for India does not seem bright.
Transnational corporations have so much power in a country, and they can bring so much pain or prosperity to the countries that support them. However, when a transnational corporation does damage a country, like Coca-Cola is damaging India, they refuse to take responsibility or use some of their fortune to repent for the damage they have caused unless they are forced to. In Coca-Cola’s case, they had decided to turn a blind eye to all of the problems that they were causing for India.
As the world is becoming evermore interdependent and interconnected with the supply of products being sent to one end of the Earth to the other, TNCs play an important role in modelling both global and national economies. When talking about national economies, industrialisation can occur, which is the period of social and economic change that transforms an agricultural society into an industrial one. It’s a part of a wider modernisation process, where social change and economic development are closely related with technological innovation. Examples of this are the 4 Asian tigers or dragons – the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan. These regions were the first newly industrialised countries and are known because they had very high growth rates (they become rich very fast) and fast industrialisation between the early 1960s and 1990s. E.g. From 1980-2000 South Korea industrialised by 20-25%.
Many TNCs, to increase their international presence and reputation, get involved with schemes to help the poor and assist local and national economies. For example, Shell in Nigeria has employed 5000 locals to work in oil extracting plants, thus, increasing employment in the local area and per capita income. One advantage of having a TNC locate in the area of country is an increased knowledge of technology and education, which has consequently happened in Nigeria. For example, Intel and Microsoft invested in research centres in India to train and employ thousands of Indian engineers very cheaply. Plus, literacy rates of a country, not just for men but for women also, might increase sanitation and health care. An example
would be that due to Dyson’s plant in Malaysia there has been improved infrastructure and technology transfer. In some places such as Dhaka and India there is decreased child labour as improvements in income and generally spent on income. As for negative impacts on a national scale, the exploitation of workers is a controversial topic. It is thought that there is unsafe, forced employment of children in the textile industry in Bangladesh. It is known that Banksy created a piece of art on a wall of a TNC, which symbolised unjust child labour. A negative social issue on a national scale includes that of health and safety e.g. in Bhopal, India, 1984, there was a gas leak from a pesticide plant (Union Carbide) in the heart of the city which killed many thousands of people and injured half a million. Moreover, there is the potential of loss of jobs and redundancies where locals lose their jobs as manufacturing and even service-based jobs are outsourced. In 2002, Dyson was set to move its manufacturing to the far East with the loss of about 800 jobs.
On a global scale, urbanisation is likely. Due to manufacturing jobs in cities made available by globalization, urbanization in China has grown from 18% to 39%. Moreover, an additional impact is that of increased trade and capital flows and economies of scale by exporting goods to other countries. Moreover, there is better reallocation of resources. For example, labour intensive industries have shifted to China, Bangladesh and other places with a cheap labour-comparative advantage. In addition, job creation could occur on a global scale due to the indirect job creations as a result of the multiplier effect. For example, suppliers are likely to be all over the world. As for the negative global impacts, cultural homogenisation could become apparent such as that of ‘Americanism’ and ‘McDonaldisation.’ Many TNCs from Western countries such as America or the United Kingdom locate in Eastern countries and, over time, habits are picked up. As previously stated, a loss of jobs could occur in an area, however, if unemployment increases in an area then people have less disposable income and so a type of multiplier effect could be apparent, however, a negative on at that.
As more and more TNCs acquire geographical flexibility more resources and production plants will shift between countries and locations, even research
and development plants. This means it is likely that an area will not only have national impacts such as job creations, improvements in technology, increased sanitation and health care, exploitation of workers and health and safety but growing impacts on a global scale too such as cultural homogenization, indirect job creation, increased trade and capital flows and urbanization on a global level. This is crucial, especially because it could not only change every country’s way of life but every person’s way of life as well.
Coca-Cola runs community schemes in Africa and South East Asia, thus benefiting countries like Malaysia with improved infrastructure. Also, one of Coke’s microfinance start-up schemes provide 4000 Vietnamese women with the merchandise, training and basic equipment to begin selling Coca Cola. In addition, there is likely to be direct job creation, which helps to boost the local economy.
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