Politics and economics

• Sometimes, global flows cannot take place due to political barriers created by national governments. Global flows may be viewed as threats by these governments as:

  • Imports of raw materials and commodities can threaten a nation’s own industries.
  • Migrants bringing cultural change and religious diversity: not everyone welcomes this
  • Information can provide citizens with knowledge that their government finds threatening.
  • Many examples can be found of national governments attempting to isolate or protect themselves from flows, including FDI from overseas TNCs.
• Bretton Woods Institutions

  • IMF, World Bank, WTO
  • Established after WW2 in order to restabilise the world economy and avoid a return to conditions like the Great Depression in the 1930s, when global economic downturn led to free trade being replaced by protectionism
  • Nations had blocked foreign imports with tariffs, damaging export markets for other countries, resulting in a vicious downward spiral of economic output for all major players
• Future of Bretton Woods players

  • The global financial crisis of 2008 / 2009, which originated in US and EU money markets, undermined the world economy. So governments in developing countries are more sceptical of the financial advice that the IMF and World Bank offer.
  • New alternatives are emerging eg developing countries can instead approach the China Development Bank (CDB). China invested around US$350 billion in Africa between 2005 and 2019. In 2014, the BRICS group of nations announced the establishment of the New Development Bank (NDB) as another alternative to the World Bank and IMF.
• IMF

  • The IMF channels loans from rich nations to countries that apply for help. In return, the recipients must agree to run free market economies that are open to outside investment. As a result, TNCs can enter these countries more easily
  • IMF rules and regulations can be controversial, especially the strict financial conditions imposed on borrowing governments, who may be required to cut back on health care, education, sanitation and housing programmes
• World Bank

  • The World Bank lends money on a global scale. In 2014, a US$470 million loan was granted to the Philippines for a poverty reduction programme. The World Bank also gives direct grants to developing countries (in 2014, help was given to the Democratic Republic of the Congo to kick start a stalled mega dam project).
  • In total, the World Bank distributed US$ 64 billion in loans and grants in 2018. However, like the IMF, the World Bank imposes strict conditions on its loans and grants. Controversially, all World Bank presidents have been American citizens.
• World Trade Organisation

  • The WTO took over from the General Agreement on Trade and Tariffs in 1995. The WTO advocates trade liberalisation, especially for manufactured goods, and asks countries to abandon protectionist attitudes in favour of untaxed trade (China was persuaded to lift export restrictions on ‘rare earth’ minerals in 2014).
  • The WTO has failed to stop the world’s richest countries, such as the USA and UK, from subsidising their own food producers. This protectionism is harmful to farmers in developing countries who want to trade on a level playing field
• Offshoring

  Some TNCs build their own new production facilities in ‘offshore’ low wage economies. For instance, US guitar-maker Fender opened its Mexican plant at Ensenada in 1987
• Foreign mergers

  Two firms in different countries join forces to create a single entity. Royal Dutch Shell has headquarters in both the UK and the Netherlands
• Foreign aquisitions

  When a TNC launches a takeover of a company in another country. In 2010, the UK’s Cadbury was subjected to a hostile takeover by US food giant Kraft. The UK has few restrictions on foreign takeovers. In contrast, the Committee on Foreign Investment in the USA closely scrutinises inbound foreign takeovers
• Transfer pricing

  Some TNCs, such as Starbucks and Amazon, have sometimes channelled profits through a subsidiary company in a low tax country, such as Ireland. The Organisation for Economic Co-operation and Development (OECD) is now attempting to limit this practice.