3.3B Role of TNCs

• ​Transnational corporations (TNCs) are firms with operations in more than one country. 

  • When a firm changed from a national company to a TNC by opening operation in another country (FDI), it creates international connections, spreading globalisation. 
  • Growth in size and number of TNCs is encouraged by the creation of trade blocs, removing international barriers, and changing government policies to encourage economic liberalisation, including removing capital controls and legal restrictions, and creating SEZs. 
• Why Firms Become TNCs

  • Firms aim to maximise profit, becoming a TNC helps to do this by reducing costs, or generating higher revenues from new markets.
  • New foreign operation may be part of production process in a lower cost location, or a retail outlet to access new markets and increase revenue. 
• Offshoring

  • This is the process of moving part of a company's own production process to another country, e.g. building a new factory in China, where wage rates are lower. 
  • Especially to SEZs in Asian countries. 
  • It reduces costs as wage rates are lower, tax rates are lower, proximity to raw materials reduces transport costs, less environmental regulation. 
  • However, some firms are vertically integrated, carrying all stages of the production process out themselves, e.g. Royal Dutch Shell. 
• Outsourcing

  • This is the process where a firm contracts with another company to obtain goods or services from it.
  • Outsourcing is more flexible than offshoring as the TNC can quickly shift supplier if a cheaper source becomes available. 
  • However, less direct control over the production process can lead to problems, e.g. in 2013 Tesco discovered that its Romanian supplier was mixing horsemeat into budget beefburgers. 
  • This is usually administration and data processing - Bangalore in India is known for this. 
• Outsourcing

  • E.g. BMW, the German TNC, outsources component production to 2,500 different suppliers for the Mini - the engine is made by Brazilian suppliers, where the wage rate is lower, windscreen made in France where there are no tariffs because it's in the EU etc.
• Outsourcing and offshoring lead to the production of global production networks. These reduce costs, allowing TNCs to make larger profits, and/or lower prices. Much  of China's rapid economic growth has been fuelled by western TNCs locating manufacturing plants in its SEZs, creating jobs and boosting exports, taking advantage of China's economic liberalisation since 1978. 
• Developing New Markets

  • Opening new outlets in another country increases revenue for TNCs.
• Glocalisation

  • Some TNCs sell identical 'authentic' products in all countries, e.g. Lego, Louis Vuitton handbags
  • Glocalisation is the process of adapting brands and products to suit the local market conditions, such as taste, laws or culture. 
• Glocalisation

  • E.g. Cadbury's chocolate is sweeter in China due to local tastes
  • McDonald's only has vegetarian outlets in some parts of India due to the local Hindu and Sikh beliefs
  • Volvo driving seats positioned on the different sides of the car
  • Dutch 'big brother' refilmed using local participants
  • MTV avoid overtly sexual music videos in the Middle East due to local culture and religion
• Drawbacks of TNCs

  • GPNs may make TNCs more vulnerable to shocks in different parts of the world that halt production. 2011 Japanese tsunami halted component supplies to offshore Nissan factory in Sunderland. 
  • TNCs have been accused of exploiting workers in the developing/emerging world by paying them low wages.
  • Outsourcing jobs can lead to job losses in the home country. 
  • Local cultures and traditions can be eroded by TNC brands and western ideas. 
• Drawbacks of TNCs

  • In 2013, the Rana Plaza textile factory in Bangladesh collapsed, killing 1,100 workers and halting supplies of outsourced garments to Benetton and Wal-Mart.