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Transnational Corporations (TNCs) - Introduction

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Also known as MNCs (Multinational Companies) these are large businesses that operate in a number of countries. They often separate their production between various locations, or have their different divisions – Head Office and Administration, Research and Development, Production, Assembly, Sales – separated around a continent or the globe.

Reasons for growth of TNCs

  • Global expansion of a major product with worldwide markets, such as Coca Cola
  • Take-over of foreign competitor firms, such as BMW
  • Merger with foreign firms into one large international company, such as GlaxoSmithKline
  • Vertical integration: acquiring the companies that sell you materials and components, and/or that you sell on to for manufacture, assembly or sales.
  • Horizontal integration: acquiring the companies that make similar components that, along with yours, will go into the final product.
  • Diversification: using the profits from one major company to purchase companies dealing with different products in order to spread risks from loss of sales or financial fluctuations.
  • Risk dispersal: firms may find it advantageous to distribute their plants in a range of countries so that union disputes, government instability, supply disruptions and financial uncertainty in any one country does not disrupt overall production. Production can be switched to alternative plants relatively quickly if need be.
  • Profit maximisation: firms may set up divisions abroad for a range of reasons:
    • Locatein low business-tax countries and ensure their profits are registered there so they pay minimum tax. Ireland has one of the lowest tax regimes in the EU at 12.5% (20% in UK) and attracts many US firms marketing to Europe.
    • Locate to avoid trade tariffs and tax barriers. Some Japanese car firms set up plants inside the EU to avoid import taxes being imposed on cars from Japan.
    • Locate in low production-cost countries where wages are lower. As these are often the single largest cost for a firm, locating production in low-wage economies can maximise profits at a stroke.
    • Locate in low-regulation countries where there are fewer laws (or less regulation/enforcement) governing employment rights, trade union rights and environmental protection.

Over time amalgamations of firms results in a trend towards fewer, larger corporations that operate with an international workforce selling to an international market. As a result of greater economies of scale (the larger the scale, the cheaper it is to do) TNCs are able to make greater profits, enjoy a higher share price and can absorb or take-over smaller, independent national companies or simply put them out of business by capturing the majority of the market and offering a product at a lower price.

The divisions of an organisation will often be located in countries with different characteristics:

  • The head office registered is usually in the country of origin, or a low business-tax country.
  • Research and Development (R&D) often takes place in countries with highly skilled scientists and engineers and with world-class universities.
  • Branch plants: manufacturing of components takes place where a reliable product can be efficiently produced without threats to long-term continuity.
  • Assembly will often occur close to the major market for the final product.
  • Sales, Marketing and Service: take place close to the main markets for the product.

It would be incorrect to imagine all TNCs are involved in manufacturing. Some of the largest are involved in resource extraction and production (oil and gas companies, copper and gold-mining), some are financial and insurance companies (major banks), some are media companies (such as News Corporation – owners of SKY as well as The Times newspaper).

In terms of their location, TNCs can affect where in the world employment is growing, where it is declining, which national economies are expanding and which are contracting, and the movement and flow of goods, services and employees between various parts of the world.

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