Geofile Jan 2006 Tnc

Transnational corporations (TNCs) arevery large global companies. They havean administrative headquarters (HQ), aResearch and Developmentestablishment (R & D) and productioncentres in one country and at least one,but often many more, branches and/orproduction centres overseas. Over thepast 30 years major technologicaladvances in transport (containerisation,bulk carriers and air freight), alongwith developments in computerisationand communications (satellites andinternet), have brought about theglobalisation of the world’s economyand the resultant growth in size andnumber of such TNCs.

Approximately 90% of TNCs are basedin MEDCs, especially the USA, France,Germany, the UK and Japan (Figures 1and 2).

Overseas branches are in LEDCsbecause:• production costs are usually less

than in MEDCs, with lower wages,cheaper land and lower transportcosts

• governments of LEDCs want tohost TNCs as they often encouragefurther economic development(multiplier effect), and so they offerfinancial incentives such as lowrates and taxes etc.

• LEDCs often have fewerenvironmental restrictions whichreduces production costs.

TNCs also have branches in otherMEDCs, often choosing areas with:• a suitable workforce (e.g. car

companies usually choose placeswith a history of engineering);

• cheap land – often in decliningindustrial areas;

• well-developed transport facilitiesto market areas;

• high unemployment, providing agood available labour supply;

• past economic problems so that thegovernment is prepared to offerfinancial help, e.g. grants and lowerrates and taxes.

By building branches in other MEDCsfirms can also:• establish operations within trade

barriers, thus avoiding quotas andimport duties, e.g. the EU countriesset up quota restrictions on theimport of Japanese vehicles to

protect their own car industries’sales. Japanese companies havebuilt factories within the EU, e.g. inthe UK Toyota located at Derby(see case study), Honda at Swindonand Nissan at Sunderland. Thesecars are considered as‘manufactured in Europe’ and soare not limited by quota restrictions

• focus on the tastes of local people,known as ‘host market’ production,and be more ‘visible’ to the area’sconsumers, increasing sales. Togain a higher share in the USdomestic luxury car market, Toyota

introduced a separate brand calledLexus in 1989. This has nowbecome the number-one-sellingluxury car brand in the US, andToyota introduced it in Japan in2005.

Recently, firms in newly industrialisedcountries (NICs), especially in the ‘tigereconomies’ of Eastern Asia, whichproduce machinery, electronics andcars, have become TNCs. As wage costshave risen in their home countries theyhave extended into neighbouringLEDCs with cheaper labour, e.g.

JANUARY 2006

513

Barbara Melbourne

Geofile Online © Nelson Thornes 2006

Transnational Corporations

GeofileOnline

2002 Country Product

1 General Electrics USA Aero-engines, engineering 2 Vodafone UK Telecommunications 3 Ford USA Vehicles 4 British Petroleum UK Oil-based activities 5 General Motors USA Vehicles 6 Shell Netherlands / UK Oil-based activities 7 Toyota Japan Vehicles 8 Total, Fina, Elf France Oil-based activities 9 France Telecom France Telecommunications 10 Exxon USA Oil-based activities 11 Volkswagen Germany Vehicles 12 E.ON Germany Electricity, gas and water 13 RWE Germany Electricity, gas and water 14 Vivendi Universal France Media 15 Chevron, Texaco USA Oil-based activities

Corporation 16 Hutchison Whampoa Hong Kong Diversified 17 Siemens Germany Electrical and electronics 18 Electricité de France France Electricity, gas and water 19 Fiat Spa Italy Vehicles 20 Honda Japan Vehicles

Figure 1: Top 20 non-financial TNCs in 2002, ranked by foreign assets

Figure 2(a): Countries of origin ofTNCs in Developed World (MEDCs)

Figure 2(b): Countries of origin ofTNCs in Developing World (LEDCs)

USA 13

France8

Germany8

UK4

Japan4

Switzerland4

Spain3

Netherlands3

Italy2 Australia

1

MEDCs

Hong Kong11

Singapore9

Mexico7

South Africa7

Rep. of Korea4

Brazil3

Malaysia 3

Taiwan3

Argentina1

Philippines1 Thailand

1

LEDCs

Korean companies to China, and tomarket areas such as EU countries.

TNCs are very dominant in the currentglobal economy and are found in allsectors (Figure 3). They:• grow, process and distribute most of

the world’s food products;• harvest most of the world’s timber

and make most of its paper;• mine, refine and distribute most of

the world’s oil-based fuels;• extract most of the world’s

minerals;• build most of the world’s oil, gas,

coal, HEP and nuclear powerstations;

• produce most of the world’s cars,aeroplanes, chemicals, medicines,computers and home electronicsetc.;

• supply many services linked withbanking and finance, transport andtourism, etc.

They also:• directly employ around 45 million

people and provide jobs indirectlyfor millions more workers;

• currently control over 75% of worldtrade, 40% of which involves themovement of goods between unitsof the same corporation in differentcountries.

Issues linked with the growthand success of TNCsMost TNCs are very wealthyorganisations: • the combined annual incomes of

Ford and General Motors aregreater than the GDP of the wholeof sub-Saharan Africa;

• the 10 largest TNCs have a totalincome greater than 100 of the

world’s poorer economies;• in 2002, Nestlé recorded profits

greater than Ghana’s GDP thatyear;

• In 2003, Unilever’s profits were athird larger than Mozambique’sGDP.

There have been many accusations ofhuman rights violations in LEDCswhere TNCs are known to operate.Also, hundreds of millions of farmersand workers, many women, earn onlyone or two dollars per day.

There have also been many cases ofsevere environmental degradation as aresult of the activities of TNCs. It hasbeen said that TNCs should apply thelaws that exist in their own countrieswhen operating in LEDCs, but this israrely the case. A ‘polluter pays’ systemshould be operated. However, TNCsare not always completely to blame forenvironmental problems, as oftenLEDCs have a legislative system inplace but do not enforce it stronglyenough.

TNCs have also altered their methodsof operation, due to unfavourablemedia attention and worldwide badpublicity. They have introduced ideassuch as:• community investment

programmes which improve thequality of life for local people byimproving infrastructure, e.g.financing electricity supply for localtowns, building roads, etc. andpaying for university and secondaryschool places, etc. for local people;

• training their staff inenvironmental awareness andcarrying out environmental impact

assessment studies on possiblefuture sites;

• reclaiming degraded land byremediation schemes, e.g. plantingnew trees to replace those damagedby exploration;

• schemes to increase the volume ofgas utilised and reduce gas-flaringwhich leads to air pollution.

• organising stakeholder workshopsand generally working andplanning for the future usingsustainable developmentguidelines.

Case studiesThe Royal Dutch/Shell Group ofcompanies: (‘Shell’) This is a European-based TNCinvolved in oil and gas production. It isjointly owned by the UK andNetherlands. Shell operates in morethan 140 countries and employs morethan 112,000 people worldwide. In2004, Shell produced 3% of the world’soil and 3.5 % of the world’s natural gas,similar to other major world oilcompanies and achieved its highest netincome ever, a sum of $18.2 billion! Itholds third place in the ‘oil world’ afterExxon and BP in terms of revenue.

Shell has five core businesses:• Exploration and Production: in

operation for over 100 years andnow found in 34 countries.

• Oil Products: producing anddistributing a wide range ofproducts, e.g. petroleum, aviationfuel, bitumen (for roadconstruction) and raw materials forthe chemicals industry. Shell has aninterest in 55 oil refineries.

• Downstream Gas and Power:serving over 20 million customersper day from its 46,000 servicestations in more than 90 countries.Shell aviation refuels a plane every4 seconds.

• Chemicals: producingpetrochemical building blockswhich are sold worldwide and madeinto a wide range of goods, e.g.detergents, mobile phones,medicines and toys.

• Renewables: although committedto the production of energy-efficient and low pollutant oil-basedfuels, Shell is also closely involvedwith renewable resources such assolar and wind power installations.

A brief study of Shell’s work in Nigeriais a useful study of some of the issuesinvolving the operations of a TNC in aLEDC.

January 2006 no.513 Transnational Corporations


MEDCs LEDCs

Motor vehicles 9 1 Electrical and electronic equipment 7 7 Petroleum linked activities 7 2 Electricity, gas and water services 6 1 Media 3 1 Telecommunications 3 3 Diversified Industries 2 7 Paper, chemicals,construction materials 2 4 Transport and trade 2 5 Food and beverages 1 7 Metal products and mining 1 5 Pharmaceuticals 4 Retail 3 Hotels and real estate 4 Rubber and plastics 3

Figure 3: Industries by type in top 50 non-financial TNCs, ranked by foreign assets

Notes: The No 1 TNC has foreign assets of $230,000 million and No 50 has $21,000 million.In the LEDCs list of TNCs the No 1 has foreign assets of $48,000 million and No 50 has $623 million.No 1 on the LEDC list is equal in value to No 16 on the MEDC list



Shell in NigeriaNigeria, Africa’s leading oil producer, isone of the world’s top ten producersand also has vast natural gas reserves.As a poor LEDC (with a GDP of$1000, 60% of its population livingbelow the poverty line, a birth rate of40/1,000 and life expectancy of 47years), oil is very important to thecountry’s economy, accounting for 20%of its GDP and 95% of its exportearnings.

Shell has been very important inNigeria, operating in the main oilregion, the Niger delta area, for over 60years, and currently produces nearlyhalf the country’s oil output. It alsoworks 8 natural gas stations and hasbuilt over 6,000 km of pipelines andflow-lines. It employs 5,000 people,95% of whom are Nigerian and 66%from the local delta area. Another20,000 people are indirectly employedby companies providing services andsupplies.

The development of the oil industryhas, however, produced manyproblems in the country. For manyyears Nigeria suffered from political

instability with many changes ofgovernments, corruption, dictatorshipsand military rule. Nigeria had an oil-based economy giving the large oilTNCs considerable power andinfluence in such an unstable country.Oil production took place atconsiderable expense to the lifestyle ofthe people and the local environmentin the oil areas. The oil companies andgovernment benefited financially butthe local people saw few financialrewards for the disruption to their lives.There was considerable unrest andtension between the TNCs and localtribes such as the Ogoni people of thedelta area who protested, sometimesviolently, about environmental issuesand lack of government support.

Environmental effects have included:• oil spills (over 4,000 since 1960,

which contaminated food suppliesand destroy natural habitats);

• gas flaring, i.e. burning gas whichcannot be collected, resulting in airpollution. The new government hasset a deadline of 2008 to eliminatethis practice;

• deforestation, clearing land toproduce oil and gas which greatly

reduced local forests used to supplyfoodstuffs and fuels.

It is only in the last few years that anew civilian government has tried toimprove the situation, e.g. byincreasing payment to the local peoplefrom 3 to 13% of the oil revenues, andputting more restrictions on theoperations of the oil companies.

ToyotaThe Toyota Motor Co Ltd was firstestablished in Japan in 1937. In 1959,its first overseas plant was opened inBrazil. By 2004 the company:• was the third largest manufacturer

of automobiles in the world andby far the largest in Japan,producing one vehicle every 6seconds!

• had 12 plants and 11 subsidiarycompanies in Japan and 51manufacturing companies in 26countries from the USA to India;

• employed just over one quarter ofa million people worldwide;

• sold nearly 6.72 million vehicles,from mini-vehicles to large trucks,in over 140 countries (Figure 6).

Benefits• Employment: jobs are created for locals both at the

TNC and in associated building, transport and serviceindustries

• Improved technology: new technology, expertise andmanagement skills are introduced such as qualitymanagement systems and ‘just in time’ production;technical skills of workers may be upgraded

• Infrastructure development: is often required by theTNCs, and locals benefit from, e.g. new roads, airports,improved power and water supply

• Financial support: TNCs have to pay taxes like othercompanies, even if these are reduced, to governmentsand local authorities

• Inward investment: the local economy is improvedwithout using the local taxpayers’ money

• Exports are increased which help the balance-of-payments situation creating more ‘buying power’ forthe host country

• Multiplier effect: the local economy can be boosted by,e.g. growth of components suppliers; increasedpersonal income generates more ‘ buying power’ forconsumer goods which can lead to the growth anddevelopment of service industries

• Economic base widened: TNCs often help LEDCs climbthe ladder of economic development

• Social improvements: TNCS often agree to contributeto the local economy by improving local services suchas health and education

• Reduction in racism and nationalism as people ofdifferent nations work together and become moreaware and tolerant of each other’s lifestyles andcustoms.

Drawbacks• Labour force: in LEDCs the local labour force is often

exploited with long working hours and low rates of pay.Young children are often employed and membership ofunions is not allowed. Skilled and managerial positionsare often filled by people from the origin country

• Foreign decision-makers: TNCs are often moreconcerned about profits than workers and overseasbranches are often closed first in times of financial crisis

• Profits mainly go back to the country of origin ratherthan being used to improve the local area

• Grants given to TNCs: sometimes the money would bebetter spent directly, e.g. on local housing, diet,sanitation etc. than on indirect development

• Health and safety issues: often receive insufficientattention, resulting in a range of problems, e.g. atBhopal in India in 1984. This was the worst industrialdisaster in the world when a gas leak from a pesticideplant in the heart of the city killed many thousands ofpeople outright and injured around half a million people

• Environmental laws – often less restrictive in LEDCsand, if present, are often relaxed to attract companies,resulting in air, water and land pollution, loss of wildlifehabitats, loss of agricultural land etc.

• Development of large energy schemes, needed by theTNCs, can create large national debts for LEDCgovernments which they often find difficult to repay

• Competition with local industries can occur, either interms of employment or the products created

• Increased urbanisation: many TNCs in LEDCs are inlarge cities causing further problems of overcrowding.

Figure 4: effects of TNCS on host countries

The automotive business makes upover 90% of the company’s total sales,the remaining 10% of its operationsincludes telecommunications,prefabricated housing (includingearthquake resistant designs) andleisure boats. Toyota, like many otherTNCs, has realised the importance ofcreating a good public image and usingenvironmentally-friendly practices andis famous for its Toyota ProductionSystem, with a main goal ofeliminating waste. This has enabledToyota to reduce pollution andproduction costs. Toyota’s twofactories in the USA have achieved‘zero landfill status’, as Toyota sells orgives away all waste products tocompanies that recycle the waste.

Toyota in EuropeWhen Toyota decided to set up aplant for its expanding market inEurope to avoid tariffs and quotas, itchose the UK because of its:• excellent skilled and flexible

workforce;• strong tradition of engineering and

vehicle manufacturing andfavourable working practices;

• large domestic market for Toyotacars;

• reliable industrial transport links tocustomers and the 230 British andEuropean supply partners;

• ease of integration andcommunication, as English is verymuch the second language inJapan;

• first class environment in which tolive and work;

• supportive positive attitude toinward investment from thegovernment.

Within the UK two sites were chosen,both offering good transportation linksto all parts of the UK and Europe:• Burnaston, a 600 acre site, flat and

easy to develop, 7 miles fromDerby, with its long tradition of carmanufacturing;

• Deeside, 7 miles from Chester on awell-prepared industrial park.

The local authorities in both locationsshowed great enthusiasm andwillingness to assist Toyota, providingan effective infrastructure, i.e.electricity, gas, water, telephones, andalso business and personnel supportservices, to help the company and itsworkers to integrate into the localcommunities.

The first of its cars in the UK wasproduced in 1992 and Toyota is nowthe UK’s fourth largest exporter of fullybuilt cars. Around 20% of TMUK’sproduction is for the home market,75% is exported to Europe and 5% tothe rest of the world. In 2002 Toyotaexports made a very useful £500 millionnet contribution to the UK’s balance ofpayments. In 2003, TMUK becameToyota’s first European factory toexport vehicles to Japan.

ConclusionIt can be seen from the above accountthat TNCs are a very important andpowerful force in the global economy.They have many advantages and somedisadvantages to both the countries oforigin and their host countries. For

many years they have grown rapidlywith little control on their activitiesand operations, especially in LEDCs.Increased control on a global scale isnecessary and if effective TNCs willcontinue to be a major feature of theglobal economy for the foreseeablefuture.

Suggested websitesGeneral: http://unctc.unctad.org/html/index.htmlUNCTAD (trade and development)site that covers TNCs

http://www.globalpolicy.org/socecon/tncs/tables.htmdata tables on TNCs

http://www.globalpolicy.org/socecon/tncs/2005/01powerhungry.pdfActionAid document on regulation offood companies

Case studies:Shell:www.shell.com/

Toyota:www.toyota.com/



1. Study the data given in Figures 2 and 3. Compare the TNCs that arefound in MEDCs and LEDCs, and give reasons for any differences that younotice.

2. Imagine that you were working for a TNC producing cars and were askedto do a feasibility study to evaluate whether location X in country Y wouldbe a suitable choice for setting up a new production centre. Discuss thefactors that you would consider when making your decision.

F o c u s Q u e s t i o n s

Figure 5: Shell: employment by sector

200

400

600

800

1000

1200

1400

1600 N. & S. AmericaAsiaAfricaEuropeOceania

20042002200019981996

Overseas totalDomestic total

7000

6000

5000

4000

3000

2000

1000

020042002200019981996

Figure 6(a): Toyota overseas anddomestic vehicle production figures (Nosof vehicles in thousands)

Figure 6(b): Toyota vehicle productionby world region (Nos of vehicles inthousands)

Exploration and ●●●●●●●●●Production

Gas and Power ●

Oil Products ●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●

Chemicals ●●●●

Corporate and ●●●●Other

Key: each ● = 2,000 people

Education

Geofile Jan 2006 Tnc