3.3B: Role of TNCs

• Why do 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.
  • To create international connections, spreading globalisation.
• 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.
• Glocalisation

  • Glocalisation is the process of adapting brands and products to suit the local market conditions, such as taste, laws or culture.
  • 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
• Disadvantages 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.