In the last 30 years, globalisation has led to a relative shift of manufacturing from North America, Europe, Japan to LEDCs in Asia and Latin America. This is likely to continue. By 2005 it is likely that almost one in three jobs in manufacturing industry will be in LEDCs. The huge growth in inward investment by Taiwanese firms in East and South-East Asia between 1986 and 1997 is an example of the global shift. This growth has been fuelled by the liberalisation of the Chinese economy in the 1990s, pro-market reforms and low labour costs throughout the region.
There are two main reasons why firms produce globally. Firstly, because by locating overseas they can get round trade barriers such as tariffs, quotas and voluntary agreements which protect home markets and secondly because production over seas often lower costs. TNCs main gain access to cheaper labour and materials, and operate in an environment with fewer and less stringent pollution controls. However on the lines of the locational theory, there is little evidence to suggest that large firms locate close to overseas markets to reduce their transport costs, but in the long run it probably does.
TNCs have to choose the most suitable location in order to make the most out of their investment. Between 1950 and 1970, the number of TNCs increased rapidly and it was usually the existence of a valuable natural resource that attracted their attentions. One of the most important reasons why a TNC will become established in a new country is the level of incentives offered by the home government. Some countries really encourage inward investment because they believe it will help their economy and further develop their country.
The choice of a particular country for investment often centres on political factors. Governments are usually keen to encourage inward investment. It not only creates jobs, it boosts exports that help to balance a countries trade. Competition between countries to attract investment is often intense. Most governments offer a package of financial inducements to TNCs. TNCs often have the power to trade of one company against another in order to get the best deal.
In South East Asia, host countries developed export processing zones within which goods were imported cheaply, infrastructure was provided and the normal restrictions concerning foreign ownership of national assets was ignored. For example, many US TNCs have established themselves in the border industrial zone in Mexico to take advantage of cheap labour, lack of import duties and their proximity to the home country.
There have been a number of trends that have emerged since 1980’s. Firstly there has been an increase in cross investment, where an increasing tendency for those countries which have there own TNCs to also be the destination country for other countries TNCs. Secondly, there is an increasing number of foreign TNCs that use the United States as a host country. The US remains the single largest recipient of foreign direct investment (FDI) in the world.
After the US, China is the second largest recipient of FDI in the world and the largest among the developing world. Initially, TNCs attracted to China concentrated on labour intensive manufacturing industries, but in recent years TNCs such as Mitsui, Siemens, Coca Cola, IBM, and Volkswagen have begun to concentrate an increasing percentage of their investment on capital intensive and technological intensive industries, the service sector and on infrastructure projects.
Another example is TNCs in Bangladesh. TNCs such as Daewoo have been attracted to Bangladesh because of low wage rates compared to other Asian countries and ‘spare’ quotas to supply ready-made clothes to the European union and to the US.
Countries often choose these countries in order to maximise their spatial profit margins. This takes into account both revenue and costs. Costs are made up of production cost (wages and rent) and transport costs. Spatial profit margins do not assume that a firm automatically chooses the optimal location. It states that a firm must locate somewhere within the spatial margins of profitability. The exact location may depend on the knowledge, ability and goals of decision makers. Either way the location chosen will be almost certainly sub optimal.
This is why the growth of TNCs is so rapid in the locations that are chosen which, are beneficial to the company and to the host country that has been chosen.
- “ Describe, with examples, some of the geographical problems that have emerged as a result of the growth of Transnational Corporations.”
It is hard to appreciate how much power lies with the world’s transnational corporations. By their sheer size they have become major world players. Sales of Japan’s Itochu Corporation exceed the gross domestic product (GDP) of Austria, while those of Mitsui and General Motors exceed the GDP of all sub-Saharan Africa combined. TNCs now control two thirds of all world trade and 80% of foreign investment.
Some argue that TNCs, as the ‘lifeblood of the global economy’, are of particular importance to people in developing countries. The reality is very different as TNCs employ only 3% of the world’s labour force and less than half of those employed are in the South. Where they are employed, the scramble by governments to attract TNC investment has resulted in a ‘race to the bottom’ in working conditions, with he rights of the working people sacrificed in order to create the ‘most attractive’ investment environment. And as TNCs use their immense purchasing power to take over local markets, local firms are commonly swept aside.
This freedom to act without regard for social responsibility has made TNCs the champions of ‘free’ trade, opponents of any regulation of their activities worldwide. Nowhere is this more evident than in their lack of respect for human rights. Oil giant Shell has admitted supplying weapons for use by Nigeria’s security forces against protestors in Ogoniland, just as BP has openly funded military terror squads in Colombia for years. In West Papua, Freeport presses ahead with mining while Indonesian military deals with local protestors incensed at the destruction of their land.
The same applies to TNCs environment record. Destruction of whole ecosystems by mining and oil companies, the thousands killed in disasters such as Bhopal, and as well as the ongoing everyday pollution by companies for which ‘going green’ is merely a public relations pose. Why did the Kyoto summit fail to come up with meaningful targets on climate change? This was because the powerful members of the Global Climate Coalition in which they themselves were responsible for almost half of the world’s total greenhouse gas emissions that then mounted to a multimillion-dollar campaign to persuade the US government to back up business as usual.
What is not so well known is that TNCs are massive polluters, directly responsible for 40% of the world’s greenhouse gas pollution. Rural people in low-income countries are priced out of the land market. They are forced to move to hillsides, for example, where the soil erodes easily, or to forests where they have to clear trees to grow food. Family pressure from the poor rather the market pressure from big business is blamed for these moves. In the Philippines, agribusiness-producing sugar, cotton and pineapples in the North pushed 12 million settlers into lowland forests.
Some people worry that TNCs have grown too powerful for national governments to control. In 1992 the UN had to abandon 16 years of work on an international code of conduct for TNCs because of the combined opposition from the governments of the rich North continue to push for more overseas investment rights for TNCs paying little attention to the urgent protests coming from the South. It is now down to ordinary individuals to watch over big business. The good news is that however powerful TNCs may be, they are still afraid of public pressure.
The investment of TNCs has a range of positive and negative effects. On the positive side it leads to increased employment opportunities, wealth creation and through the multiplier effect to an improvement in overall infrastructure and broader economic opportunities as a result of the growth of other manufacturing industry and service. On the negative side, there has often been rapid urban growth with poor housing and cramped, unhealthy conditions, health problems related to industrial activity and short and long term land use problems. The economic and social problems, which are most apparent in regions of economic decline, are effectively the reverse of the multiplier effect.
The environment also has a dual effect on industrial location. The levels of control on environmentally damaging activities vary both within and between countries. Controls on emissions, dumping of dangerous substances, limitations on visual impact and the need for landscaping are some examples and there is evidence that variations in the levels of controls do affect location choice especially for industries which are potentially the most damaging environmentally. For example, the environmental damage created by the ‘maquiladora’ factories on the Mexican side of the US – Mexican border contrasts with the effects of the factories owned by the same companies in the USA, Britain or Germany, where environmental controls are stronger, though still variable.
Industries based in Taiwan are increasingly capital intensive (petrochemical, machinery) and technology intensive (electronics). In 1998, these industries accounted for 71% of total manufacturing output compared to 48% in 1986. Taiwan is one of the worlds leading supplier of motherboards, monitors, personal computers, mice, keyboards, scanners and laser disk drives. The core of Taiwan’s high tech industry is the government established Hsinchu Science Park near Taipei. Known as Silicon Valley East, it accounts for one-third of Taiwan’s manufacturing exports. A second science park is currently being built near the southern city Taiwan. The speed and success of Taiwan’s industrialisation, investment into areas in China and South-East Asian countries as well as Taiwan’s own inward investment has caused severe environmental degradation. However there is no doubt that the environmental problems have been made worse by the country’s geography. Taiwan is a small country with a large population and a mountainous relief. Most of the population and industrial activity is centred in the western alluvial plains that comprise less than half the island total area. Factories have routinely discharged liquid toxic waste into rivers and solid waster into landfill sites, resulting in contaminated food chains and soils.
Are TNCs the problem or the solution? There is clearly no definite answer. With every TNC there is potential for both positive and negative effects on both the home and host nation. The true impact of TNCs cannot be evaluated unless we can be sure of what would have happened without the TNC. They obviously have a number of positive and negative effects in which are clearly waiting to happen. People themselves have little power to try and solve these problems and are therefore in a position to ignore the consequences and make the most of the advantages.
