7 TNCs & FDI

Question 1

What is a TNC?

Answer 1

a firm owning a foreign affiliate and operating in more than one country

TNCs make investments in productive assets outside their home base

Question 2

How do TNCs gain access to overseas productive facilities?

Answer 2

•Taking over already existing locally-owned capacity (via MnA) or by by investing directly in new productive facilities

Question 3

Two main reasons for becoming a TNC

Answer 3

• Securing Inputs: Cost Orientated rationale

* Securing Markets: Market Orientated rationale

Question 4

Cost rationale

Answer 4

* Trading with suppliers of inputs in other countries means that potential TNCs face a make or buy decision

 -There might be cost advantages to making the inputs rather than buying them from existing suppliers
 -Lower transaction costs, lower costs of production
 -Local state policies / Taxation
 -Employment law / Regulations
 -Efficiency can be increased by formation of TNCs

Question 5

Market rationale

Answer 5

*Firms look to enter new markets and increase sales by becoming TNCs

 - Access to markets and sales growth is aided by setting up a branch ‘on the ground’
 - Having a presence overseas reduces transport and tariff costs and presents opportunities to exploit own brand in host countries (e.g. Marks and Spencer’s establishing branches in India)

Question 6

Effects of TNCs

Answer 6

Geographical flexibility of production
 - Resources can be shifted globally to take advantage of local conditions
 - E.g. Dyson relocated production from the UK to Malaysia
 -Further cost flexibilities?

The existence of TNCs can lead to positive spill-over effects for host economies
 - Transfer of new ideas and technology
 - Employment and skills

Question 7

Disadvantages of TNCs (for host nations)

Answer 7

TNCs do not always pass on the gains of their operations to host nations
 - Gains are mostly captured by TNCs
 - Profit can be shifted to the lowest tax regime via internal movements within TNCs (G&W, 2011, pp.143-44)

TNCs may outcompete and displace domestic firms

Question 8

Benefits of TNCs domestically in UK

Answer 8


Employment, ‘technology transfer’, and productivity
 TNCs tend to have higher productivity than domestic firms
 TNCs strengthen existing supply chains and set a positive example for domestic firms to follow
 Regional development (e.g. Nissan in Sunderland)

UK benefits by playing host to the national champions of other countries

Foreign ownership presents greater economic benefits than costs and ought to be encouraged by government

Question 9

Concerns regarding domestic activity of TNCs in UK

Answer 9

Capital flight problem
 -Are TNCs here for the long term?
 -Danger of a ‘race to the bottom’ in search for inward investment (employment policy / regulation)

Opportunity cost of money spent attracting TNCs