3.10.1 GLOBALIZATION OF ECONOMIC ACTIVITY

THE GROWTH OF TRANSNATIONAL CORPORATIONS

What is a Multinational Business?

A multinational business PRODUCES & SELLS goods in more than one country

A multinational is NOT just a business which just SELLS goods in more than one country

What is transnational (multinational) corporation?

• A corporation that operates in many different countries regardless of national boundaries

• According to Peter Dicken

“a firm that has the power to coordinate and control operations in more than one country, even if it does not own them”

Examples of transnational corporations

• Royal Dutch/Shell explores for oil in 50 countries, refines in 34, and markets in 100.

• Offices of the US food processing firm H.J. Heinz cover six continents

• Cargill, the US's largest grain company, operates in 54 countries.

• Britain's leading chemical company ICI has manufacturing operations in 40 nations and sales affiliates in 150.

Facts about transnational corporations (TNC)

• A rough estimate suggests that the 300 largest TNCs own or control at least one-quarter of the entire world's productive assets, worth about US$5 trillion.

• TNCs' total annual sales are comparable to or greater than the yearly gross domestic product (GDP) of most countries (GDP is the total output of goods and services for final use by a nation's economy).

• e.g. Royal Dutch/Shell sales equal Iran's GDP. Mitsui and General Motors sales together are greater than the GDPs of Denmark, Portugal, and Turkey combined.

• TNC’s account for 5 per cent of world employment

• Although TNCs employ only a small fraction of the world's workforce, they are particularly important employers in some sectors and nations.

e.g. TNC’s account for one fifth of all paid employment in non-agricultural sectors and are particularly important in manufacturing industries in which technology is important.

In the mid-1980s, 50 per cent of employed individuals in Ghana and Tunisia were working in transnational corporations.

TNCs engaged in manufacturing account for over 20 per cent of all employment in developing countries such as Argentina, Indonesia, Malaysia and Sri Lanka.

• TNCs are the driving force behind economic globalization

• There are few parts of the world not influenced by TNCs

• Apart from their direct ownership of productive activities, many TNCs have collaborative relationships with other companies e.g. Nike

• A large percentage of world trade takes place between TNCs

Advantages of becoming a multinational

• Economies of scale– Low labour costs– Reduced transport costs

– Increased sales

• Obtain raw materials

•Spread risks

•Higher profits

•Find new markets

•Avoid trade barriers

For the firm….

Advantages of Multinationals

• New investment in their country• Jobs created• Additional Tax• More competition• More favourable Balance of Payment

– Fewer Imports– More exports

For the host country….

Disadvantages of multinationals

• Extra competition• Profits often leave the country• Use up scarce raw materials• High influence over the country• Exploitation of workers• May move if variables change

For the host country….

What are the advantages and disadvantages of a TNC to the

host country