Consequences of transnational corporations outsourced production
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Published: Mon, 5 Dec 2016
Large multinational firms are the drivers for the globalization of research and development and innovation activities. The importance of globalization and transnational corporations are increasingly becoming popular (Hedlund, 1993), one of the main reasons for that is the fact that transnational corporations are one of the major actors in the global economy and the leading figures in the economic growth. These corporations tend to satisfy demands of people from distant lands and provinces (Held and McGrew, 2008).
Transnational corporations (TNC) are considered one face of globalization, and its emergence is a consequence of globalization and the cross-border interdependence, moreover it is considered, nowadays, the fastest growing form of transactional relationships(Held and McGrew, 2008; Scholte, 2005; Ravenhill, 2005). As defined by Modelski (1979), ‘transnational corporations is regarded as a network of enterprises that controls activities and assets in more than one state and in more than one country’ (Modelski, 1979:1) i.e TNCs are considered the main agent of global integration in production, distribution and exchange.
This essays aims to focus on the economic face of globalization: transnational corporations, in specific. How these huge institutions have come to be, and how they almost filled up 50 percent share of the global economic market, using contemporary methods such as outsourcing and off-shoring. One of the top main transnational corporations is going to be thoroughly viewed which is the athletic wear corporation, based in the United State; Nike. What is its strategy to deal with globalized economy?
After offering a review on the transnational corporations as a consequence of globalizations, a critique on the challenges these corporations face will be demonstrated.
The aspect of globalization is not a new one, but rather evolved starting with history of invasions, colonialism and trading, telegraph and international financial operations, and the unbalanced patterns of production (Scholte, 2005). Its emergence has destroyed the amount of national industries that use national raw material because even the raw materials are now being shipping from across the glob (Marx and Engels, 1850).
One of the characteristics of the contemporary global economic system is globalization and the interdependence of regions, in respect to trade, services and much more. Globalization consists of different aspects including; economical, political, technological and cultural (Karl Marx & Friedrich Engels, The Communist Manifesto, 1850), the identification of these aspects assisted multinational, transnational and international corporations in achieving their goal of cross regional trade.( Stonehouse, et al,
2004) As the prophet of media Marshall McLuhan (1995) augured the First Coming of the “global village” and the as a result ways of operating and production, outsourcing, trade and foreign exchange were facilitated.
So what does globalization means? Not different from other international business terms, there is not one definite terminological definition for globalization, but it is agreed on, from around the world as the cross-border transactions amongst countries as well as normative and political commitments it is also referred to as international economic integration (Bentham, 1789; Suganami, 1978), globalization is moreover illustrates a borderless combined nations and capitals (Scholte, 2005). The proliferation of global talk was intense at different fields of education, sociology, business, globalization of market and also in international relations starting in the early 1980s (Scholte, 2005). Since the 1990s globalization has become a major academic growth industry (Scholte, 2005).
Ways of production, outsourcing and off-shoring became easier because of globalization. That led to the emergence of multiple world trade and foreign exchange institutions .(Koehane and Nye, 1977, WTO, 2002).
This emergence of trade between boundless pro-portions should be taken seriously, and they have, as it was proven that they could affect the world’s flow of capital and economies of individual countries and cause a crisis Held and McGrew, 2008; Scholte, 2005; Ravenhill, 2005). A demonstration of this was valid when the predictions of experts have come unexpectedly bringing the world into a new phase of ‘clash of globalization’ i.e. the economic crises caused by a major company in the United States (Hoffmann, 2002).
This golden age encounters a widespread expanding of interconnectedness of human affairs, economies, traditions and world systems. Consequently, it is obvious to realize the disparity between internal and external, affairs, domestic and international and local and global arenas, this notes that the world has become more complex and knotted. (Modelski, 1972; Walerstein, 1974; Keohane and Nye, 1977).
Transnational corporations are generally known as the network of enterprises that shape up the activities and assets in global economy (Modelski, 1979).
Ever since firms have become more interested in ‘transnationalization’, analysts have become interested in studying the organizational structure of the transnational corporations that is; how do they operate? What are their stategies? What are the challenges they face?
According to Held and McGrew (2008), transnational corporations are the party that most benefit from the fast changes in globalization, through technology and innovation. There ways of operating were facilitated as it became easier to outsource and offshore and yet main its control on all or parts of the global commodity chain (Korzeniewicz, 2004). Over the past 3 decades, according to Ravenhill (2005), the geographical extension of nations allows the outsourcing production in the most dynamic industrial sectors, investment in overseas production dominating these processes are the transnational corporations (TNCs). Such corporations have got liberalization of national financial markets constituted by the law of the World Trade Organisation (WTO), wherever business requires location without any restrictions, this has eased shifting and movement between countries and continents (Held and McGrew, 2008; Ravenhill, 2005; Scholte, 2005). So what distinguishes transnational corporations is that neither governments nor states can have complete intervention or control over their namely TNCs global trade (Scholte, 2005).
On the other hand, the constant change of business environment requires transnational corporations (TNC) to meet competitive advantage which could be attained through the gaining market knowledge and to be faster than the competitors (Stonehouse et al., 2004).. Knowledge creation involves informing individuals as well as learning on a corporate level (Scholte, 2005; Stonehouse et al., 2004). International marketing segmenting should respond with national differences of demands. According to Kale and Sudharsham (1987), transnational marketing segments should be compatible with the requirements for global marketing co-ordination. This implies making customers and their demands the basis for segmentation. Stonehouse et al. (2004) suggests that it should preserve the customer loyalty through making advantage of being customer-oriented. Market segments are identified by qualifying criteria; (age, sex, income, etc.). In this sense, segments are size distributed accordingly to each country and then aggregated across countries to measure the total market. Through the strategically equivalent segments, transnational business is globally allowed without totally converging different cultures (Stonehouse, 2004).
Therefore, transnational business, in particular corporations, is able then to gain more profits through undercut the prices of more nationally oriented competitors. Global strategy should be based on standardization of product branding and advertising (Levitt, 1983). However, global environment is becoming increasingly complex, thus should meet more sophisticated systems to strategy.
One main strategy- as well as opportunity- of transnational corporations is to invest in developing countries as these countries compete to have huge TNCs operate in their region. The governments of these countries fully sponsor corporations, because in the end hosting countries are enjoying a decrease in the unemployment rate (Stonehouse et al, 2004).
Most Transnational corporations do not carefully follow the global commodity chains; they tend to focus primarily on one part either production, marketing, manufacturingâ€¦etc and pay less attention on the others. Therefore, most TNCs use outsourcing as a main operating method to assist them in keeping the main management and administrative operations under control. Outsourcing and offshorring have been around from decades, since the realization that different regions are specialized in a certain function; a good example is the oil transfer from the gulf to areas around the glob (Polhill, 2004; Modelski, 1979). On a smaller scale TNCs hire external services, so that they could deal with the day to day operations, such as marketing and advertisement or a hiring agency. An important use of outsourcing is when transnational corporations operate in different regions, TNCs hire different analysts and consultants to carefully study the market and the demands of customers (Stonehouse, 2004).
Nike, the athletic sportswear manufacturer, took into consideration all parts of the commodity chain from the design to advertisments. This gave them an innovative strategy, which kept them ahead of their game, having an increase in their revenue year after year (Korzeniewicz, 2004).
NIKE’S Case study
Nike is one of the significant transnational corporations that regulates and at sometime totally dominates the United States athletic footwear market. Its policy is dependent on taking advantage of the implementations of globalisation. As a transnational company, NIKE designed its commodity chain processes to be spread around the world. They have based the headquarters of the company in the United States of America which is responsible for the design and fashion, the advertisement and R&D are distributed around the world in order to facilitate the research and to be fast in achieving the demands of the customers. Yet the entire manufacturing takes place in the Far East, as the labour work there is extremely efficient and yet at a very low cost (Korzeniewicz, 2004; Stella, 2008).
Nike also outsourced it computing and IT matters to the Affiliated Computer Services Inc (Korzeniewicz, 2004), this incorporation kept records of data and security of information of the transfer of merchandise from different locations.
The speard of the reseach and development allowed Nike to be ahead of it game, because they learned about the trends and the demands faster than their competitors. As mentioned earlier management knowledge is significant for corporations, especially transnational corporations as they are dealing with different regions in different parts of the world. Aside from corporate knowledge, Nike had low manufacturing cost as it was outsourcing the production process to a region where the minimum wage was far less than in any developed country this all assisted in the increased revenue and market share Nike posses because as their profit increased they re-invested in the company to further develop their products and their facilities (Hymer, 2000). This led to customer loyalty as mentioned by Kindleberger & Laffargue (2008), because according the costumers their needs are directing being met by Nike faster than other sportswear manufacturers. Another reason for customers’ loyalty is the fact that Nike had reduced the barriers between different groups of people with different cultures and different backgrounds, sportswear where made for everyone, that was their innovative strategy (Liebscher, et al., 2007).
For there is a constant change of consumer’s demands, Nike keeps spending budgets on developing commodity chains to satisfy and adapt markets.
Although transnational corporations may lose contact with consumers, since other companies are doing the work on their behalf, yet Nike has kept in contact and met the people’s demands of each phase with strategies of plausible prices and good quality through the constant innovative processes (Korzeniewicz, 2004). In other words, there is a life circle of any product the moment it is produced it responses to some expectations then its popularity increases gradually to reach peak then starts to decline, however Nike can revive its products before the products popularity totally vanishes (Korzeniewicz, 2004). In other words, it is making use of constant innovative production to avoid probable crises.
Transnational corporations and there operations brought attention to some legal and human rights institutions (Sikka and Hampton, 2005). One reason for that is the power that transnational corporations (TNC) possesses, specially their power to influence policies in the less economically developed countries (UNCTAD, 2004). As most transnational corporations operate using outsourcing, some drawback came out of that operation to start with, the most debatable aspect is that of employment, and how one region enjoys the decrease of unemployment yet another experience a higher rate of unemployment. Other than that a country’s caplital and economic growth could be manipulated by such strong corporations as was demonstrated in the credit crunch that the world is stil trying to recover from (United Nations Conference on Trade and Development, 1998). This shows that governments and countries are somewhat power-less when it comes to huge, wealthy, and powerful transnational corporations (Korten, 1998; Sikka and Hampton, 2005)
Now a days , and coming years will see a more intense focus on the booming practice of using child labour under conditions unimaginable to most Americans, international trade in products made by children, in many cases under indentured servitude, is legal under the WTO, like Bangladesh workers factories that makes clothes for Wal-mart are paid half or far less than the countries’ legal minimum wage ,the standards of justice for the oppressed children and young adults labouring for the massive profits of Wal-Mart, Nike, and other giant companies, consumer dollars can speak power and truth )Sikka and Hampton, 2005).
Transnational corporations developed because of the facilitated access to the world and because of the development of the global village. TNCs have benefited a lot through the operation on a global level, weather the benefits where presented by the host countries- no taxation, government assistance, land, labour- or the benefits where directing affecting the company such as higher market share on a global scale or higher profit margin.
Free trade meant the right of free people to do business with each other, but what is happening today is showing that the right of the powerful rides roughshod over the powerless. More than twenty thousand workers in Nicaragua at dawn streaming into the free trade zone in the capital city, Managua, Mainly women, into the factories where owners pay no taxes or export duties and no living wages either, Where they work six days a week, ten hours a day, making clothes for companies like Wal-mart and Kmart, Sewing pairs of jeans at the cost of about 20 cents a pair, including wages, when they retail in the States for between 30 and 40 dollars (United Nations Conference on Trade and Development, 1998; The Economist, 20 April 1999).
Although numerous benefits arise because of globalization and the operations of transnational corporations, yet the many legal, moral and social responsibilities issues arising should not be denied.
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