1. JANUARY 2006
Online
Geo file 513
Barbara Melbourne
Transnational Corporations
Transnational corporations (TNCs) are Figure 1: Top 20 non-financial TNCs in 2002, ranked by foreign assets
very large global companies. They have
an administrative headquarters (HQ), a 2002 Country Product
Research and Development 1 General Electrics USA Aero-engines, engineering
establishment (R & D) and production 2 Vodafone UK Telecommunications
centres in one country and at least one, 3 Ford USA Vehicles
but often many more, branches and/or 4 British Petroleum UK Oil-based activities
production centres overseas. Over the 5 General Motors USA Vehicles
past 30 years major technological 6 Shell Netherlands / UK Oil-based activities
advances in transport (containerisation, 7 Toyota Japan Vehicles
bulk carriers and air freight), along 8 Total, Fina, Elf France Oil-based activities
with developments in computerisation 9 France Telecom France Telecommunications
and communications (satellites and 10 Exxon USA Oil-based activities
internet), have brought about the 11 Volkswagen Germany Vehicles
globalisation of the world’s economy 12 E.ON Germany Electricity, gas and water
and the resultant growth in size and 13 RWE Germany Electricity, gas and water
number of such TNCs. 14 Vivendi Universal France Media
15 Chevron, Texaco USA Oil-based activities
Approximately 90% of TNCs are based Corporation
in MEDCs, especially the USA, France, 16 Hutchison Whampoa Hong Kong Diversified
Germany, the UK and Japan (Figures 1 17 Siemens Germany Electrical and electronics
and 2). 18 Electricité de France France Electricity, gas and water
19 Fiat Spa Italy Vehicles
Overseas branches are in LEDCs 20 Honda Japan Vehicles
because:
• production costs are usually less
than in MEDCs, with lower wages, Figure 2(a): Countries of origin of Figure 2(b): Countries of origin of
cheaper land and lower transport TNCs in Developed World (MEDCs) TNCs in Developing World (LEDCs)
costs
• governments of LEDCs want to MEDCs LEDCs
host TNCs as they often encourage Italy Philippines
2 Australia 1
further economic development 1 Thailand
Argentina 1
(multiplier effect), and so they offer Netherlands 1
3
financial incentives such as low
rates and taxes etc. Taiwan
3
• LEDCs often have fewer Spain Malaysia Hong Kong
environmental restrictions which 3 USA 13 3 11
reduces production costs. Brazil
Switzerland 3
4
Rep. of Korea
TNCs also have branches in other Japan 4 Singapore
MEDCs, often choosing areas with: 4 9
France
• a suitable workforce (e.g. car 8
UK South Africa
companies usually choose places 4 7
Germany Mexico
with a history of engineering); 8 7
• cheap land – often in declining
industrial areas;
• well-developed transport facilities
to market areas; protect their own car industries’ introduced a separate brand called
• high unemployment, providing a sales. Japanese companies have Lexus in 1989. This has now
good available labour supply; built factories within the EU, e.g. in become the number-one-selling
• past economic problems so that the the UK Toyota located at Derby luxury car brand in the US, and
government is prepared to offer (see case study), Honda at Swindon Toyota introduced it in Japan in
financial help, e.g. grants and lower and Nissan at Sunderland. These 2005.
rates and taxes. cars are considered as
‘manufactured in Europe’ and so Recently, firms in newly industrialised
By building branches in other MEDCs are not limited by quota restrictions countries (NICs), especially in the ‘tiger
firms can also: • focus on the tastes of local people, economies’ of Eastern Asia, which
• establish operations within trade known as ‘host market’ production, produce machinery, electronics and
barriers, thus avoiding quotas and and be more ‘visible’ to the area’s cars, have become TNCs. As wage costs
import duties, e.g. the EU countries consumers, increasing sales. To have risen in their home countries they
set up quota restrictions on the gain a higher share in the US have extended into neighbouring
import of Japanese vehicles to domestic luxury car market, Toyota LEDCs with cheaper labour, e.g.
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2. January 2006 no.513 Transnational Corporations
Figure 3: Industries by type in top 50 non-financial TNCs, ranked by foreign assets assessment studies on possible
future sites;
MEDCs LEDCs • reclaiming degraded land by
Motor vehicles 9 1 remediation schemes, e.g. planting
Electrical and electronic equipment 7 7 new trees to replace those damaged
Petroleum linked activities 7 2 by exploration;
Electricity, gas and water services 6 1 • schemes to increase the volume of
Media 3 1 gas utilised and reduce gas-flaring
Telecommunications 3 3 which leads to air pollution.
Diversified Industries 2 7 • organising stakeholder workshops
Paper, chemicals,construction materials 2 4 and generally working and
Transport and trade 2 5 planning for the future using
Food and beverages 1 7 sustainable development
Metal products and mining 1 5 guidelines.
Pharmaceuticals 4
Retail 3 Case studies
Hotels and real estate 4
Rubber and plastics 3 The Royal Dutch/Shell Group of
companies: (‘Shell’)
Notes: The No 1 TNC has foreign assets of $230,000 million and No 50 has $21,000 million. This is a European-based TNC
In the LEDCs list of TNCs the No 1 has foreign assets of $48,000 million and No 50 has $623 million. involved in oil and gas production. It is
No 1 on the LEDC list is equal in value to No 16 on the MEDC list jointly owned by the UK and
Netherlands. Shell operates in more
Korean companies to China, and to world’s poorer economies; than 140 countries and employs more
market areas such as EU countries. • in 2002, Nestlé recorded profits than 112,000 people worldwide. In
greater than Ghana’s GDP that 2004, Shell produced 3% of the world’s
TNCs are very dominant in the current year; oil and 3.5 % of the world’s natural gas,
global economy and are found in all • In 2003, Unilever’s profits were a similar to other major world oil
sectors (Figure 3). They: third larger than Mozambique’s companies and achieved its highest net
• grow, process and distribute most of GDP. income ever, a sum of $18.2 billion! It
the world’s food products; holds third place in the ‘oil world’ after
• harvest most of the world’s timber There have been many accusations of Exxon and BP in terms of revenue.
and make most of its paper; human rights violations in LEDCs
• mine, refine and distribute most of where TNCs are known to operate. Shell has five core businesses:
the world’s oil-based fuels; Also, hundreds of millions of farmers • Exploration and Production: in
• extract most of the world’s and workers, many women, earn only operation for over 100 years and
minerals; one or two dollars per day. now found in 34 countries.
• build most of the world’s oil, gas, • Oil Products: producing and
coal, HEP and nuclear power There have also been many cases of distributing a wide range of
stations; severe environmental degradation as a products, e.g. petroleum, aviation
• produce most of the world’s cars, result of the activities of TNCs. It has fuel, bitumen (for road
aeroplanes, chemicals, medicines, been said that TNCs should apply the construction) and raw materials for
computers and home electronics laws that exist in their own countries the chemicals industry. Shell has an
etc.; when operating in LEDCs, but this is interest in 55 oil refineries.
• supply many services linked with rarely the case. A ‘polluter pays’ system • Downstream Gas and Power:
banking and finance, transport and should be operated. However, TNCs serving over 20 million customers
tourism, etc. are not always completely to blame for per day from its 46,000 service
They also: environmental problems, as often stations in more than 90 countries.
• directly employ around 45 million LEDCs have a legislative system in Shell aviation refuels a plane every
people and provide jobs indirectly place but do not enforce it strongly 4 seconds.
for millions more workers; enough. • Chemicals: producing
• currently control over 75% of world petrochemical building blocks
trade, 40% of which involves the TNCs have also altered their methods which are sold worldwide and made
movement of goods between units of operation, due to unfavourable into a wide range of goods, e.g.
of the same corporation in different media attention and worldwide bad detergents, mobile phones,
countries. publicity. They have introduced ideas medicines and toys.
such as: • Renewables: although committed
Issues linked with the growth • community investment to the production of energy-
programmes which improve the efficient and low pollutant oil-based
and success of TNCs quality of life for local people by fuels, Shell is also closely involved
Most TNCs are very wealthy improving infrastructure, e.g. with renewable resources such as
organisations: financing electricity supply for local solar and wind power installations.
• the combined annual incomes of towns, building roads, etc. and
Ford and General Motors are paying for university and secondary A brief study of Shell’s work in Nigeria
greater than the GDP of the whole school places, etc. for local people; is a useful study of some of the issues
of sub-Saharan Africa; • training their staff in involving the operations of a TNC in a
• the 10 largest TNCs have a total environmental awareness and LEDC.
income greater than 100 of the carrying out environmental impact
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3. January 2006 no.513 Transnational Corporations
Figure 4: effects of TNCS on host countries
Benefits Drawbacks
• Employment: jobs are created for locals both at the • Labour force: in LEDCs the local labour force is often
TNC and in associated building, transport and service exploited with long working hours and low rates of pay.
industries Young children are often employed and membership of
• Improved technology: new technology, expertise and unions is not allowed. Skilled and managerial positions
management skills are introduced such as quality are often filled by people from the origin country
management systems and ‘just in time’ production; • Foreign decision-makers: TNCs are often more
technical skills of workers may be upgraded concerned about profits than workers and overseas
• Infrastructure development: is often required by the branches are often closed first in times of financial crisis
TNCs, and locals benefit from, e.g. new roads, airports, • Profits mainly go back to the country of origin rather
improved power and water supply than being used to improve the local area
• Financial support: TNCs have to pay taxes like other • Grants given to TNCs: sometimes the money would be
companies, even if these are reduced, to governments better spent directly, e.g. on local housing, diet,
and local authorities sanitation etc. than on indirect development
• Inward investment: the local economy is improved • Health and safety issues: often receive insufficient
without using the local taxpayers’ money attention, resulting in a range of problems, e.g. at
• Exports are increased which help the balance-of- Bhopal in India in 1984. This was the worst industrial
payments situation creating more ‘buying power’ for disaster in the world when a gas leak from a pesticide
the host country plant in the heart of the city killed many thousands of
• Multiplier effect: the local economy can be boosted by, people outright and injured around half a million people
e.g. growth of components suppliers; increased • Environmental laws – often less restrictive in LEDCs
personal income generates more ‘ buying power’ for and, if present, are often relaxed to attract companies,
consumer goods which can lead to the growth and resulting in air, water and land pollution, loss of wildlife
development of service industries habitats, loss of agricultural land etc.
• Economic base widened: TNCs often help LEDCs climb • Development of large energy schemes, needed by the
the ladder of economic development TNCs, can create large national debts for LEDC
• Social improvements: TNCS often agree to contribute governments which they often find difficult to repay
to the local economy by improving local services such • Competition with local industries can occur, either in
as health and education terms of employment or the products created
• Reduction in racism and nationalism as people of • Increased urbanisation: many TNCs in LEDCs are in
different nations work together and become more large cities causing further problems of overcrowding.
aware and tolerant of each other’s lifestyles and
customs.
Shell in Nigeria instability with many changes of reduced local forests used to supply
Nigeria, Africa’s leading oil producer, is governments, corruption, dictatorships foodstuffs and fuels.
one of the world’s top ten producers and military rule. Nigeria had an oil-
and also has vast natural gas reserves. based economy giving the large oil It is only in the last few years that a
As a poor LEDC (with a GDP of TNCs considerable power and new civilian government has tried to
$1000, 60% of its population living influence in such an unstable country. improve the situation, e.g. by
below the poverty line, a birth rate of Oil production took place at increasing payment to the local people
40/1,000 and life expectancy of 47 considerable expense to the lifestyle of from 3 to 13% of the oil revenues, and
years), oil is very important to the the people and the local environment putting more restrictions on the
country’s economy, accounting for 20% in the oil areas. The oil companies and operations of the oil companies.
of its GDP and 95% of its export government benefited financially but
earnings. the local people saw few financial Toyota
rewards for the disruption to their lives. The Toyota Motor Co Ltd was first
Shell has been very important in There was considerable unrest and established in Japan in 1937. In 1959,
Nigeria, operating in the main oil tension between the TNCs and local its first overseas plant was opened in
region, the Niger delta area, for over 60 tribes such as the Ogoni people of the Brazil. By 2004 the company:
years, and currently produces nearly delta area who protested, sometimes • was the third largest manufacturer
half the country’s oil output. It also violently, about environmental issues of automobiles in the world and
works 8 natural gas stations and has and lack of government support. by far the largest in Japan,
built over 6,000 km of pipelines and producing one vehicle every 6
flow-lines. It employs 5,000 people, Environmental effects have included: seconds!
95% of whom are Nigerian and 66% • oil spills (over 4,000 since 1960, • had 12 plants and 11 subsidiary
from the local delta area. Another which contaminated food supplies companies in Japan and 51
20,000 people are indirectly employed and destroy natural habitats); manufacturing companies in 26
by companies providing services and • gas flaring, i.e. burning gas which countries from the USA to India;
supplies. cannot be collected, resulting in air • employed just over one quarter of
pollution. The new government has a million people worldwide;
The development of the oil industry set a deadline of 2008 to eliminate • sold nearly 6.72 million vehicles,
has, however, produced many this practice; from mini-vehicles to large trucks,
problems in the country. For many • deforestation, clearing land to in over 140 countries (Figure 6).
years Nigeria suffered from political produce oil and gas which greatly
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4. January 2006 no.513 Transnational Corporations
Figure 5: Shell: employment by sector • Deeside, 7 miles from Chester on a many years they have grown rapidly
well-prepared industrial park. with little control on their activities
Exploration and ●●●●●●●●●
and operations, especially in LEDCs.
Production
The local authorities in both locations Increased control on a global scale is
Gas and Power ● showed great enthusiasm and necessary and if effective TNCs will
Oil Products ●●●●●●●●●● willingness to assist Toyota, providing continue to be a major feature of the
●●●●●●●●●● an effective infrastructure, i.e. global economy for the foreseeable
●●●●●●●●●● electricity, gas, water, telephones, and future.
●●●●●●●● also business and personnel support
Chemicals ●●●● services, to help the company and its Suggested websites
workers to integrate into the local
Corporate and ●●●● communities. General:
Other http://unctc.unctad.org/html/
Key: each ● = 2,000 people The first of its cars in the UK was index.html
produced in 1992 and Toyota is now UNCTAD (trade and development)
the UK’s fourth largest exporter of fully site that covers TNCs
The automotive business makes up
over 90% of the company’s total sales, built cars. Around 20% of TMUK’s http://www.globalpolicy.org/
the remaining 10% of its operations production is for the home market, socecon/tncs/tables.htm
includes telecommunications, 75% is exported to Europe and 5% to data tables on TNCs
prefabricated housing (including the rest of the world. In 2002 Toyota
earthquake resistant designs) and exports made a very useful £500 million http://www.globalpolicy.org/
leisure boats. Toyota, like many other net contribution to the UK’s balance of socecon/tncs/2005/01
TNCs, has realised the importance of payments. In 2003, TMUK became powerhungry.pdf
creating a good public image and using Toyota’s first European factory to ActionAid document on regulation of
environmentally-friendly practices and export vehicles to Japan. food companies
is famous for its Toyota Production
System, with a main goal of Conclusion Case studies:
eliminating waste. This has enabled Shell:
It can be seen from the above account www.shell.com/
Toyota to reduce pollution and that TNCs are a very important and
production costs. Toyota’s two powerful force in the global economy. Toyota:
factories in the USA have achieved They have many advantages and some www.toyota.com/
‘zero landfill status’, as Toyota sells or disadvantages to both the countries of
gives away all waste products to origin and their host countries. For
companies that recycle the waste.
Toyota in Europe Figure 6(a): Toyota overseas and Figure 6(b): Toyota vehicle production
When Toyota decided to set up a domestic vehicle production figures (Nos by world region (Nos of vehicles in
plant for its expanding market in of vehicles in thousands) thousands)
Europe to avoid tariffs and quotas, it
chose the UK because of its: 7000 1600
Overseas total N. & S. America
• excellent skilled and flexible Domestic total Asia
workforce; 6000 1400 Africa
Europe
• strong tradition of engineering and Oceania
1200
vehicle manufacturing and 5000
favourable working practices;
1000
• large domestic market for Toyota 4000
cars; 800
• reliable industrial transport links to 3000
customers and the 230 British and 600
European supply partners; 2000
• ease of integration and 400
communication, as English is very
1000
much the second language in 200
Japan;
0
• first class environment in which to 1996 1998 2000 2002 2004 1996 1998 2000 2002 2004
live and work;
• supportive positive attitude to
inward investment from the Focus Questions
government.
1. Study the data given in Figures 2 and 3. Compare the TNCs that are
Within the UK two sites were chosen, found in MEDCs and LEDCs, and give reasons for any differences that you
both offering good transportation links notice.
to all parts of the UK and Europe:
• Burnaston, a 600 acre site, flat and 2. Imagine that you were working for a TNC producing cars and were asked
easy to develop, 7 miles from to do a feasibility study to evaluate whether location X in country Y would
Derby, with its long tradition of car be a suitable choice for setting up a new production centre. Discuss the
manufacturing; factors that you would consider when making your decision.
Geofile Online © Nelson Thornes 2006