TNCs influence the location of manufacturing industry
Transnational Corporations (TNCs) are companies that operate globally. They usually are based in MEDCs but have branch companies all over the world. TNCs control vast amounts of world trade, only 74 firms, with 50% of trade via TNCs in America and 80% via Britain, generates 12.5% of total world production. Examples of well-known TNCs are Nike, Coca Cola, Nestlï¿½, Sony, Ford, General Motors and Mc Donald’s. Companies became multinational through Foreign Direct Investment (FDI). In the 1960s and 1970s, the economic recession, meant that profits dropped so companies became TNCs in order to expand and reduce costs. The Gross National Product (GNP) of a TNC is great, for example the GNP of Mexico is 142 compared to the TNC General Motors being GNP 127 and the GNP of Denmark is only 93 compared to Ford’s, which has a GNP of 97.
TNCs dominate the economy of both their home countries and most of the economy in Less Economically Developed Countries (LEDCs), where they choose to invest. Due to this their economic and political power is immense. They are the most advanced system, which creates economic growth, wealth and poverty. It is commonly thought that TNC invest primarily in LEDCs, because give them many advantages, including very favourable tax conditions, very cheap labour and minimal supervision in respect of human rights. Although, in fact 75% of all FDI is based in the United States, Japan, the United Kingdom, France and Germany (EU) which are all More Economically Developed Countries (MEDCs).
Multinationals will effect the location and characteristics of manufacturing as they have different requirements than other firms that operate in only in one country. TNCs still select a location based on that location’s comparative advantage. It is simply that the first comparative advantage that a TNC seeks is based on international rather than domestic considerations. Furthermore, a TNC will not necessarily choose a location within a country, which appears to have the best comparative advantage. It will instead be influenced by international rather than domestic factors. TNCs have more complex locational decisions to make.
To locate in the UK a company such as Nissan had to consider; the need to be in he EU; competition from other Japanese companies; attitude of the local government; green field sites; English as a global language for business and other domestic factors, especially government assistance. Also why are there no TNCs in Africa? This is due to many reasons, for instance poor transport links, no or little market, language issues, political conflicts and war. These all reduce the comparative advantage of areas within Africa; if no TNCs decide to locate there, other companies will not locate there, i.e. the multiplier effect will not occur.
TNCs often out compete other smaller companies by being bigger so they can produce more; having greater access to capital, of their own or borrowed; having a well known brand name; by modern, faster techniques, appealing to a larger market, overcoming variations in demand as their economies acted as a buffer and coping more easily with variations in requirements and regulations imposed by Governments.
The local and regional economy can be regenerated by spin-offs, for example the growth of component suppliers and links with the global economy are developed. Sometimes, a cluster of TNCs is attracted to a particular location. They might supply each other with components or might wish to tap into a pool of skilled labour. Local colleges and training agencies might start courses specifically designed to upgrade the local workforce. As an example, Silicon Glen has grown across Central Scotland as a region of hi-tech manufacturing. The name “Silicon Glen” originating from the Silicon Valley area of California, which was an early centre of the computer industry. The M4 corridor is another area where the spin-offs from FDIs have led to rapid economic growth, generated from the main TNCs Sony in Newbury, Microsoft in Reading, Hewlett Packard in Bracknell and Hitachi in Maidenhead.
Government influences may lie at the root of industrial location, but it is the process of cumulative causation that will in fact establish the prosperity of an area. Cumulative causation of the Multiplier Effect is a process that has arisen from agglomerations and linkages. Agglomerations locate nearby proximity of other firms, i.e. around TNCs; hence, it develops the comparative advantage of the area. Whilst a linkage is the relationship between firms and their suppliers and their markets. Agglomerations and linkages factors depend on existing manufacturing industries where they present in an area. Therefore, they do not actually create location’s comparative benefits. As an alternative, they develop the comparative benefits. Hence, it develops the comparative advantage of the area.