3.3.4 Transnational Corporations (TNCs)

Question 1

Transnational corporation (TNCs)

Answer 1

Companies that operations in two countries.

Question 2

TNCs play an important role in the global economy. In 2013 what percentage of global trade was linked to TNCs?

Answer 2

80% of global trade was linked to TNCs.

Question 3

Why TNCs do choose to operate in more than one country?

Answer 3

1) To escape trade tariffs.
2) Cheap Labour
3) Flexible workforce
4) Availability of finance to fund expansion
5) Fewer environmental restrictions
6) Globalised Transport Network (Containerisation)
7) Technological developments
8) Government encouragement
9) Cheap land

Question 4

[Why TNCs choose to operate in more than one country]

To escape trade tariffs

Answer 4

• Lowers cost of production
• Access to new markets
• Exploitation of resources

E.g. Nissan’s production in Sunderland was to gain free access to the EU. They were very vocal in the Brexit debate.

Question 5

[Why TNCs choose to operate in more than one country]

Cheap labour

Answer 5

• Lower wages in LICs and unemployment in HICs.
• E.g. The Chinese have been accused of exploiting cheap African labour in pursuit of cheap raw materials.

Question 6

[Why TNCs choose to operate in more than one country]

Flexible workforce

Answer 6

• Willingness to travel to jobs oversees or to be retrained in situ.
• E.g. Training call centre employees for UK based companies.

Question 7

[Why TNCs choose to operate in more than one country]

Availability of finance to fund expansion

Answer 7

• TNCs from emerging economies have heavily invested overseas to increase their portfolios.
• E.g. The Indian TNC Tata Steel bought Corus Steel in 2006 and Tata Motors bought Jaguar Land Rover from Ford in 2008.

Question 8

[Why TNCs choose to operate in more than one country]

Fewer environmental restrictions

Answer 8

• Environmental controls may be less or weakly enforced.
• E.g. oil exploitation on the Niger delta.

Question 9

[Why TNCs choose to operate in more than one country]

Globalised Transport Network (Containerisation)

Answer 9

• Containerisation has revolutionised the movement of goods by creating a standard transport product that can be handled anywhere in the world. All containers are the same shape and same size.

Question 10

[Why TNCs choose to operate in more than one country]

Tchnological developments

Answer 10

• Refrigeration or freeze drying allows perishable fruit and vegetables from LICs to be transported to HICs.

Question 11

[Why TNCs choose to operate in more than one country]

Government encouragement

Answer 11

• E.g. Financial incentives such as tax breaks.

Question 12

[Why TNCs choose to operate in more than one country]

Cheap land

Answer 12

• E.g. Areas suffering from de-industrialisation or changes in land use.
• Example: Nissan in Sunderland built car factories on sites of former airfields.

Question 13

What encourages corporations to Ireland?

Answer 13

• Low corporation tax rate
• Access to UK and EU markets.

Question 14

Corporation tax rate in Ireland

Answer 14

Ireland has a very low corporation tax rate of 12.50%.

When Biden became President in 2021, he set a minimum level of corporation tax for OECD countries at 15%.

Question 15

Benefits of TNCs for the host country

Answer 15

• Increased employment which therefore raises living standards.
• Wider share ownership – individuals and companies more willing to become involved in foreign investment.
• Improves the worker’s levels of skills and new experiences.
• Increased purchasing power which leads to demand for consumer goods and further economic growth.
• Overseas investment adds to income for the whole nation (via tax).
• Encourages a transfer of new technology into the country, for example the growth of telecommunications.
• Socio-economic multiplier effects.

Question 16

Problems of TNCs for the host country

Answer 16

• Poor working conditions.
• Fewer controls such as environmental legislation.
• Exploitation of resources.
• As a result of loopholes not all corporation tax is paid fully by the TNCs.
• Managerial positions tend to be brought in rather than developed locally.
• Investment may only be short term and TNCs could pull out at any minute.
• Many jobs are of low skill in LICs.
• Negative impacts of environment and local culture.
• Majority of profits tend to be sent back home.

Question 17

Benefits for TNCs

Answer 17

• Lower cost because of cheaper land and lower wages (and fewer trade unions).
• Fewer controls such as environmental legislation.
• Exploitation of resources.
• As a result of loopholes not all corporation tax is paid fully by the TNCs.
• Cheaper goods.

Question 18

Problems for TNCs

Answer 18

• Ethical issues such as the image of environmental damage or ‘sweatshops’ can be detrimental to the brands reputation.
• Workforce may need to relocate and make numerous visits overseas.

Question 19

Benefits of TNCs for the country of origin

Answer 19

• Managerial positions tend to be brought in rather than developed locally.
• Cheaper goods.
• Majority of profits tend to be sent back home.
• Overseas investment adds to income for the whole nation (via tax).

Question 20

Problems of TNCs for the country of origin

Answer 20

• Workforce may need to relocate and make numerous visits overseas.

Question 21

Types of integration

Answer 21

• Vertical
• Horizontal

Question 22

Vertical integration

Answer 22

Where a supply chain of that company is owned entirely by that company from raw material right through the final product.

Question 23

Horizontal integration

Answer 23

Where a company diversifies its operation either by expansion, merger or a takeover. This usually happens when TNCs use common structures to other competitors in order to cut costs.

Question 24

Examples of vertical integration

Answer 24

Example: BP has over 40 oil and gas fields worldwide. It owns its own oil pipelines and shipping fleet. The company refines the oil and also has over 1,100 retail service stations in the UK.

Example: Ikea have forests for furniture in addition to distribution and sale.

Question 25

Examples of horizontal integration

Answer 25

Example: Kraft food taking over Cadbury’s in 2010 to give them a more diverse base in food and confectionary markets which then merged with Heinz in 2015 for the same purpose.

Example: Social Media - Facebook own WhatsApp and Instagram.

Question 26

Case study for TNCs

Answer 26

Apple

Question 27

Apple in Ireland

Answer 27

Apple have their European HQs in Ireland - likely because of the low (12.5%) corporation tax rate.
It employs 4,000 workers and supports over 2,500 in the supply chain.

Question 28

How does Apple avoid tax?

Answer 28

As Apple uses subsidiary firms in other countries to declare profits and pay lower levels of tax.

Many people believe the taxation system needs to be updated to accommodate large TNCs like Apple.

Question 29

Apple’s ethics

Answer 29

Apple brands itself as an ethical organisation but its supply chain suggests otherwise.

Greenpeace launched the “Green My Apple campaign” to highlight some of the environmental and ethical issues with Apple.

Question 30

Apple’s working conditions

Answer 30

• An estimated 1 million workers in China make products for Apple.
• Foxconn and Pegatron are key suppliers of Apple.
• 14 workers killed themselves in Foxconn, so they put up anti-suicide nets. They did not link this to their poor working conditions.
• Pegatron takes workers’ ID cards. Physically forcing them to stay working for the company. Without an ID card, people can’t even buy a train ticket.
• Workers live in dormitories next to the plant – 80,000 people eat, sleep and work at Pegatron. Apple ruled that accommodation must have no more than 8 people per room, when in reality, there are 12 people per dormitory.
• Workers are easily replaceable and are regularly reminded about this.
• Apple claims to give workers a choice on when they could work, whereas in reality, workers are fired for opting-out of night shifts.
• The companies create a fake audit trail so everything looks fine on paper.
• Only a few hours training is given and there is a compulsory exam afterwards, where the answers are provided. This shows to outsiders that all workers have done necessary training.
• Workers are treated extremely poorly with many feeling so tired that they fall asleep during breaks or during work. They have to work 12-16 hour shifts, with compulsory overtime.
• Workers regularly worked over 60 hours per week but Pegatron doesn’t accurately produce payroll. Overtime hours are instead called “bonuses”.

Question 31

Apple in Indonesia

Answer 31

• Banku, Indonesia is where much of the world’s tin is extracted.
• A drill gets forced into the seabed, bringing up sediment. Water is then used to separate it into tin ore.
• This process disrupts the sea bed and pollutes the water, destroying coral reefs. It is also extremely dangerous for workers – landslides are common and trap miners, killing them.
• Tin produced here is used for solder – in all electronic products, including Apple, who claim to source all raw materials responsibly.

Question 32

Unequal flows of people in China

Answer 32

In China, rural-urban migration is widespread with young people leaving rural places in search of jobs. This leaves only children and elderly people in the rural areas.

Children as young as 15 work on the production lines with false IDs. These people work up to 280hrs across 2 weeks and are dying from the poor working conditions.

Question 33

Price of an iphone

Answer 33

Approx $650

Question 34

Profit made for Apple per iPhone

Answer 34

Approx $250

Question 35

Money per iPhone that goes back to the worker

Answer 35

Approx $5

Question 36

What should the focus for a 20 mark question be on?

Answer 36

PLACE and TIME (including the future)

Question 37

How can TNCs take advantage of global marketing?

Answer 37

TNCs operate in many different countries, so can take advantage of global marketing. TNCs benefit from having a lot of money to spend on advertising and large marketing departments.

The aim of many TNCs is to create a brand that is recognised globally, e.g. Coca Cola.

Question 38

How do TNCs organise production to make advantage of a global supply chain?

Answer 38

• A global supply chain gives them economies of scale and means they get the most value from the whole of their supply chain.
• TNCs in primary industry often invest in countries with natural resources that they can extract. E.g. in 2016 Shell acquired fellow oil company BG Group to gain access to oil reserves in Brazil and Australia.
• TNCs in secondary industry often invest in countries with low labour costs and cheap land, especially where governments encourage investment with tax breaks, e.g. Toyota invests in Indonesia due to low labour costs and tax breaks on low-emission cars. TNCs also invest where there is a large market for their products, like Nissan in the UK.
• TNCs in tertiary industry often invest in countries with a well-educated population. E.g. insurance firm Aviva has invested in France, Canada and India.
• TNCs also often invest in countries with weak labour and environmental regulations. Weak regulations allow TNCs to cut costs, e.g. by making employees work for long hours for low pay, or by disposing of waste cheaply.

Question 39

Impact of TNCs on global trade

Answer 39

When a TNC first invests in a new country, it creates a multiplier effect – e.g. by opening a new factory, a corporation creates jobs for the local area, which means people have more money to spend, which helps local businesses (who can sell more of their products) and governments (who can raise more taxes).

Question 40

Mergers

Answer 40

When two companies (usually of similar size) agree to become one bigger company.

Question 41

Acquisitions

Answer 41

An acquisition is when one company buys another (usually smaller) company. E.g. The US car company Ford brought Volvo in 1999.

Question 42

Using subcontractors

Answer 42

TNCs can use foreign companies to manufacture products without actually owning the business, e.g. Nike products aren’t always made in factories owned by Nike. The links the countries of the TNC and the subcontracted company together.

Question 43

How can TNCs make links between countries and companies by expanding their operations?

Answer 43

• Mergers
• Acquisitions
• Using subcontractors
• Foreign Direct Investment (FDI)

Question 44

Why do TNCs headquarters tend to be located?

Answer 44

Big cities in more developed countries (e.g. London or New York). These cities are well connected in terms of global transport and communications, and there is a supply of highly skilled workers.

Question 45

Where do TNC’s research and development facilities tend to be located?

Answer 45

In cities and towns where there’s a supply of highly educated people, e.g. scientists and engineers. They are often in the same country as the HQs.

Question 46

Where do TNC’s factories tend to be located?

Answer 46

• Factories are often located in less developed countries where production costs (e.g. labour, material, land, etc.) are lower. For example, Apple have factories in China.
• Many TNCs also have factories in the** country where their market is**. For example, Nissan have a factory in the UK.
• If a product is made in the country where it is sold, the TNC can avoid paying import and export taxes and can reduce transport costs (especially on large items such as cars).