Describe how TNCs influence the location of manufacturing industry.

Fabina Nazmin Hussain

a). Describe how TNCs influence the location of manufacturing industry

(20 marks)

Transnational Corporations (TNCs) are companies that operate globally. They usually are based in MEDCs but have branch companies all over the world. TNCs control vast amounts of world trade, only 74 firms, with 50% of trade via TNCs in America and 80% via Britain, generates 12.5% of total world production. Examples of well-known TNCs are Nike, Coca Cola, Nestlé, Sony, Ford, General Motors and Mc Donald’s. Companies became multinational through Foreign Direct Investment (FDI). In the 1960s and 1970s, the economic recession, meant that profits dropped so companies became TNCs in order to expand and reduce costs. The Gross National Product (GNP) of a TNC is great, for example the GNP of Mexico is 142 compared to the TNC General Motors being GNP 127 and the GNP of Denmark is only 93 compared to Ford’s, which has a GNP of 97.

TNCs dominate the economy of both their home countries and most of the economy in Less Economically Developed Countries (LEDCs), where they choose to invest. Due to this their economic and political power is immense. They are the most advanced system, which creates economic growth, wealth and poverty. It is commonly thought that TNC invest primarily in LEDCs, because give them many advantages, including very favourable tax conditions, very cheap labour and minimal supervision in respect of human rights. Although, in fact 75% of all FDI is based in the United States, Japan, the United Kingdom, France and Germany (EU) which are all More Economically Developed Countries (MEDCs).

Multinationals will effect the location and characteristics of manufacturing as they have different requirements than other firms that operate in only in one country. TNCs still select a location based on that location’s comparative advantage. It is simply that the first comparative advantage that a TNC seeks is based on international rather than domestic considerations. Furthermore, a TNC will not necessarily choose a location within a country, which appears to have the best comparative advantage. It will instead be influenced by international rather than domestic factors. TNCs have more complex locational decisions to make. To locate in the UK a company such as Nissan had to consider; the need to be in he EU; competition from other Japanese companies; attitude of the local government; green field sites; English as a global language for business and other domestic factors, especially government assistance. Also why are there no TNCs in Africa? This is due to many reasons, for instance poor transport links, no or little market, language issues, political conflicts and war. These all reduce the comparative advantage of areas within Africa; if no TNCs decide to locate there, other companies will not locate there, i.e. the multiplier effect will not occur.

TNCs often out compete other smaller companies by being bigger so they can produce more; having greater access to capital, of their own or borrowed; having a well known brand name; by modern, faster techniques, appealing to a larger market, overcoming variations in demand as their economies acted as a buffer and coping more easily with variations in requirements and regulations imposed by Governments.

The local and regional economy can be regenerated by spin-offs, for example the growth of component suppliers and links with the global economy are developed. Sometimes, a cluster of TNCs is attracted to a particular location. They might supply each other with components or might wish to tap into a pool of skilled labour. Local colleges and training agencies might start courses specifically designed to upgrade the local workforce. As an example, Silicon Glen has grown across Central Scotland as a region of hi-tech manufacturing. The name “Silicon Glen” originating from the Silicon Valley area of California, which was an early centre of the computer industry. The M4 corridor is another area where the spin-offs from FDIs have led to rapid economic growth, generated from the main TNCs Sony in Newbury, Microsoft in Reading, Hewlett Packard in Bracknell and Hitachi in Maidenhead. Government influences may lie at the root of industrial location, but it is the process of cumulative causation that will in fact establish the prosperity of an area. Cumulative causation of the Multiplier Effect is a process that has arisen from agglomerations and linkages. Agglomerations locate nearby proximity of other firms, i.e. around TNCs; hence, it develops the comparative advantage of the area. Whilst a linkage is the relationship between firms and their suppliers and their markets. Agglomerations and linkages factors depend on existing manufacturing industries where they present in an area. Therefore, they do not actually create location’s comparative benefits. As an alternative, they develop the comparative benefits. Hence, it develops the comparative advantage of the area.

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Global information can be pinned down in the local areas in several ways. The importance of universities, research institutions, governmental and EU projects has often been stressed as organisations helping regional systems of improvement to avoid ‘lock-in’ situations by acting as ‘captures’ of the codes of global knowledge to regional firms and other organisations in regional systems of improvement. Another way to pin down global knowledge could be through networks established between local and global firms. Here global knowledge can be represented in the local both through the connection of local firms to globalised firms (TNCs) and through the connection of global firms to the local firms through networks to gain access to the knowledge within the firm as in the regional system of improvement. The choice of TNCs is related to changed organisation of some TNCs, having a potential for a positive impact on the access to knowledge to regional systems of improvement.

The relation of TNCs and regional firms and other organisations in the systems of improvement is now increasingly seen in a different light by some researchers. Due to new organisational forms and a changed rational of choice of location from cost-reducing regions to the competitive advantages of the regional system of improvement and higher order capabilities TNCs have changed from “cathedrals in the deserts” to firms having a positive impact on regional industrial development that goes further than simple job creation. It is stressed that this development is much likely to occur in a minority of regions also depending on the type of TNC its place of origin, culture and the type of industry, just as the characteristics of the relations or network are crucial for the impact of regional industrial development.

The shift in the production system has, according to some researchers, meant a changed and more positive mutual impact on the TNCs and regional systems of improvement. Here the interplay between TNCs and the regional firms and other regional organisations has resulted in transfers of technology, upgrading of skills and the creation of industrial organisations related to industrial development. Another common characteristic of TNCs are their extensive means to conduct research and development, to invest and to gain access to knowledge.

Just as regional systems of improvement can prosper from knowledge and opportunities represented by TNCs, the TNCs are interested in regional localised knowledge. The structure of large globalised firms stresses the need for an organisation that safeguards and develops core experiences to gain sustainable competitive advantage. The structure in the large globalised firm needs to be dual, consisting of a highly integrated, network type of organisation for the core competencies of the firm, and a hierarchical type for the activities that lie beyond the core competencies of the firm. Regarding the core competence the large globalised firm seeks to master all processes of learning related to the core competence. This include, among several other aspects, access to coded knowledge by establishing relationships with universities and research-centres with a key component to the efficiency being proximity and tacit knowledge through relations with bearers of knowledge which involves relations with reliable suppliers and other organisations in the regional system of improvement. To get information of whom the bearers of the needed tacit knowledge are that it is crucial to the globalised firm to get involved in the local social networks.

So on one hand TNCs seem to have something to offer regional systems of innovation, as well as having an interest to relate to such systems, but on the other hand the interaction between TNCs and regional systems of innovation may not be very successful, as the TNC can be seen as an outsider, not attached to the regional innovation system and its institutions. The lack of institutions common to the local firm and the TNCs can be seen as an overall explanation to difficulties of knowledge transfers being no common incentives and no common frame of reference to language and cognition. The dual organisation of TNCs could be seen as a respond to this problem. The following research questions seek to capture the problem of knowledge transfers and the relations between TNCs and regional systems of innovation.

Growth of TNCs has occurred because global markets exist for many products and services and those organisations with sufficient capital and expertise have establishes branches in new countries. They usually establish overseas markets in order to gain: access to new markets in which they might see a profitable; extend any existing markets to match competitors; provide platforms for exports as they may find it cheaper to go to the customers instead of paying large delivery cost or to attract customers as they will also save costs, e.g. Japanese electronic and automotive industry. By actually doing this they will avoid trade barriers and be able increase sales in foreign countries; products will be more diversified; costs of production will be reduced e.g. access to cheap labour. Finally economies of scale will be exploited in order to out-compete smaller national, regional and local manufacturers. However these “big industries” use local sub-contractors from Asia or Northern Africa; they no longer need to resort to foreign direct investments to benefit from the advantages of relocation.

b). Discuss the issues and conflicts, which can arise from such influences

(25 marks)

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.

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