Transnational Companies

Question 1

What is a TNC?

Answer 1

Transnational/Multinational company - a company with significant product operations in at least two companies

Question 2

What are the benefits of becoming a TNC?(11)

Answer 2

Benefits of becoming a TNC:

• Increase profits/revenues
• Expand into economies where costs (ie wages) are lower
• Opens up access to more markets -emerging markets
• Spreads risk of failure
• Avoid trade barriers
• Locate nearer to markets ower transport costs
• More scope for economies of scale & competitive advantage
• May operate transfer pricing to reduce tax liabilities
• Increases its brand identity
• Access to skilled labour
• Weak regulation (worker rights/ health & safety/ environmental)

Question 3

What are the issues of becoming a TNC?(7)

Answer 3

Issues of becoming a TNC:

• Initial high costs
• Short term losses only started to make profit after establishing brand (low prices?)
• Unfamiliarity with markets/economies laws, customs, tastes etc
• Potential diseconomies of scale
• Resistance from local consumers
• Having to contend with bureaucracy paperwork etc
• Negative publicity (sweat shops/ closing ‘home’ business)

Question 4

What are the benefits to the host country?(8)

Answer 4

1. Investment: when a TNC builds a factory, opens a supermarket etc this involves some “Foreign Direct Investment” (FD). FDI leads to an immediate boost for the local economy-work in the construction industry, work in transportation etc. However there is also a multiplier effect: these firms workers will then go off & spend their money in the local economy. Many people argue that FDI is the main way in which LEDCs can develop
2. Transfer of knowledge: When a TNC sets up it brings in its experience motivation on how run a techniques, distribution, techniques etc). These techniques can be copied firms.
3. Employment: When a TNC is set up in a host country then it reaures workers- in the factory, on the shop floor etc. This creates new jobs. In addition the TNc may provide training so increasing the skills & productivity of the labour force. These skills can be used by the local businesses when the workers move jobs (or set up their own businesses)
4. Tax: TNCs pay taxes in the economies they operate in. This could be tax on profits or taxes paid by employees. This means the local government has more money to spend on the local people-health care, education, water supplies etc.
5. Consumer Choice: By setting up the TNCwill introduce new products into a country (McDonalds!!), giving consumers a greater choice
6. Exports: TNCs export much of their production. This earns foreign currency & can finance the imports a country needs. Again this is an injection & creates a multiplier effect.
7. Improved infrastructure: As well as improved infrastructure funded by more taxes it is also possible that the TNC itself may directly fund some infrastructure projects which it benefits from, but can be used by others-like roads, ports etc
8. Competition: By setting up a TNC provides competition to local businesses. This forces the local businesses to become more efficient, increasing productivity, lowering costs etc

Question 5

What are the costs to the host country?(7)

Answer 5

1. Loss of national jobs/ identity: If a TNC sets up it may “crush” the local culture. For example McDonalds may be able to produce far cheaper than local restaurants/ fast food outlets, thus it forces these local firms out of business & so leads to a loss of jobs. This Globalisation may lead to a loss of choice & national products
2. Political Influence: Many TNCs are so large & so important for an LEDC that they can influence the politics & laws of a country. This may involve tax breaks (so reducing tax revenues) or transfer pricing, or in weak/corrupt governments being allowed to operate with dangerous working conditions, use child labour etc
3. Destruction of the Environment: TNCs tend to dominate the mining industries (oil, gas, metals) which inevitably involve some environmental destruction. others operate in manufacturing, which usually means pollution Even service sector (tourism?) industries may destroy the environment.
4. Exploitation of workers: Although TNCs may employ people they often pay ery low wages & have poor working conditions (compared to their home base). In addition many of the skilled jobs are done by “expats” from the home nation, with the host countries workers being used for the unskilled tasks. This means there is little “transfer of knowledge” & training.
5. Repatriation of profits: Profits made by a TNC subsidiary in the host country are often not reinvested in that country, but are returned to the TNCs home country.
6. Unstable nature of FDI: TNcs invest to make profit. If conditions in a country change (wages rise?) then the TNC may move away, so it would be dangerous to rely on a TNC for economic growth.
7. Transfer Pricing: A TNC can “charge itself (ie a branch of the same company in a different country) for services, such as management consultancy. This way it can decide where it makes its profits & so where it pays tax.

Question 6

How can TNCs be controlled?

Answer 6

There are 2 basic ways a TNC can be controlled ie force a change in its (unethical) behaviour:
- Legislation (gov set rules/ laws)
- Public pressure
In the first the TNC is made to change its behaviour, in the second the TNC changes its behaviour to avoid negative publicity/ damage to its brand image.

Legislation

This could include an obligation to use Joint Ventures, taxes (on pollution, on profit), minimum wages, labour conditions etc. However, this legislation may increase costs for the TNC & encourage it to withdraw from a country & locate elsewhere (where laws are more “relaxed’). The country could then lose the benefits of a TNC’s investment. In addition there may be costs to the local gov in monitoring the TNC.

Public Pressure

Public pressure can come from media campaigns or, more often, from pressure groups (NSPCC, Greenpeace etc), who highlight negative actions of TNCs, often by carrying out publicity ‘stunts’. Pressure groups also lobby governments to enact legislation

However, it is questionable that this will actually impact the TNC. They will probably counter with a ‘positive PR”campaign & consumers may be willing to accept unethical behaviour in return for low prices!