The View That Transnational Corporations Are Footloose Economics Essay
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For decades, business has existed in almost every country around the world; regardless of what industries those businesses belong to. Whether it is agriculture, finance, food and beverage, service, etc., it all started long before modern businesses were established. As of today, we can see that various corporations exist in every country around the world, regardless of name, type and the size of it. There are about 23,343,821 corporations in the US alone (U.S. Census Bureau, 2002), which still is where the majority of companies come from. These corporations all adopt different structures, all the more complex when they expand their operations to foreign countries. According to Dicken (2007), there are 4 types of TNC organisations which are Multinational, International, Global and Integrated Network. Each type serves different functions for the company; so depending on the businesses the company is involved, the organisation culture and the decision making of top management, companies adopt the one type that suits them the best.
Examples of TNC organisations are such as Microsoft, Toyota and Samsung. These TNCs started off as small organisations within their own domestic countries and have been very successful domestically. Once they dominated their domestic markets, market share was no longer sufficient to satisfy their growing desire for increase market share and profits. This resulted in them moving their businesses into foreign markets and expanded their business scope globally, which began with exports and then FDI as they could exploit differences in costs in those countries. We can now see that these TNCs exist not only in a few countries but some even have developed to numerous countries and markets. These transnational corporations are deemed as companies that have supremacy to coordinate and control operations in more than one country, even if it does not own them (Dicken, 2007). According to BBC, TNCs are massive firms that conduct their businesses in several countries and some are wealthier compared to less developed countries. (http://news.bbc.co.uk/cbbcnews/hi/find_out/guides/world/trade/newsid_3099000/3099680.stm)
There is an ongoing debate on the issue of whether TNCs are actually that powerful to be considered footloose. Footloose is defined as mobility of companies moving in and out of countries if they find it attractive in terms of market or resources opportunities. Market opportunities are such as consumers, governments' regulations, number of competitors, etc. Resource opportunities on the other hand, are like labour costs, raw materials availability and technology accessibility. In this task, a detailed assessment on TNCs and their operations will be done to help determine the fact on whether TNCs are footloose or not.
TNCs are Footloose
Profits & Labour costs
TNCs open up operations in foreign countries according to geographic matters which benefits to them. In a certain extent to this, I agree that TNCs are footloose. Based on the example of Nestlé, we can assume that TNCs are footloose. Nestlé was established in Switzerland, a small country where market size is not as large as in US or UK. Today, Nestlé is one of the leading food and beverage manufacturers in the world (Food Engineering Magazine, 2010). After 5 months of its establishment, it started manufacturing outside of Switzerland. It did not export its products to other countries because of its company's mentality to always produce locally rather than exporting. Thus, it conducted FDI and built manufacturing plants in foreign countries such as US (Appendix 1). As TNCs are capitalist where profit is key for them (Dicken, 2007), TNCs like Nestlé expanded globally to increase profits, market share and brand equity. Besides market opportunities, Nestlé also built a plant in China to take opportunities on its low labour costs in 2007 (Appendix 2). Both points to two broad categories of motivation for companies to engage in transactional operations which are market and asset orientated (Dicken, 2007). Market factors are size, structure and accessibility (Dicken, 2007). Asset factors point to knowledge and skill, wage costs, labour productivity, labour 'controllability' and labour mentality (Dicken, 2007). This applies to Nestlé due to its company culture, where it hails from Switzerland. Its history points to Nestlé utilising its strong brand equity and financial structure to negotiate its way into foreign countries (Nestlé, 2010), also by offering improvements to infrastructure and job opportunities to the locals. According to IMF (2001), with entrance of TNCs into countries, this will create jobs for unskilled workers as they have difficulty in searching jobs, moving their social class from lower class to middle class.
Hymer (1960) stated that domestic companies always had advantage over foreign firms as they understood the environment better; but foreign companies could out-compete domestic companies based on firm-specific assets such as firm size, economies of scale, etc (Dicken, 2007). Companies like HSBC started out domestically but soon built up its brand name globally which was used as an advantage to move into countries and compete with their domestic firms. It currently operates in more than 60 countries and is one of the leading banks in the world (Appendix 3). Dunning (1980) suggested that firms like HSBC engaged in transactional production was due to it having ownership-specific advantages not possessed by competitors such as knowledge, technology, etc., where it internalised these advantages and keeping it secret from competitors; also because of location-specific factors, some of these advantages has to be used in certain locations (Dicken, 2007), for example, they have strong human resources (HSBC Finance, 2009) and can use it to train the labour from China about their operations, transferring knowledge as well as saving labour costs simultaneously. This benefits both HSBC and China as the company gains in terms of cost saving while China earns new knowledge regarding how to conduct banking and utilise it for their domestic banks later.
Access to markets
WTO is one of the main reasons why TNCs are considered as footloose, such as the deregulation of the financial services in 2001. This is because WTO discovered the benefits outweighed the risk of doing so. By allowing foreign banks to enter domestic markets, it could help strengthen the financial systems in those developing countries, such as by improving the quality and efficiency of financial services. Although domestic banks suffer through the sudden increase of competition, customers gain as banks reduce interest rates and are also provide a wider range of services to customers. These benefits however depended on how it was timed with other financial reformations such as domestic financial deregulation and capital account liberalisation. In the case of the EU, internationalisation can actually support domestic deregulation (Appendix 4). Nevertheless, internationalisation is not fully dependant on other financial reformations; it could still help in stabilising capital flows as well as the financial sector of a country. Lastly, governments still need to set up regulations for foreign banks although the industry was deregulated, as this could control their operations to a certain extent. Thus, with all these, the phenomenon of international banks such as HSBC entering different foreign market has been gradually increasing, as long the regulations set for them are complied. Generally, TNCs help foreign countries gain job opportunities and improve growth for industries. For example, the banking industries in less developed countries like Vietnam are getting more competent due to threat of foreign banks entering the country (IFC, 2009). Both domestic banks and government will benefit from this as banks have to improve their services while governments earn the taxes paid by TNCs to boost growth of the country (John Madeley, 2003).
Besides liberalisation increasing competition between domestic and foreign firms, competition between governments exists as well. Certain countries around the world loosened their regulations in order to attract foreign investments into the countries (United Nations Conference on Trade and Development - UNCTAD, 2008). These countries are mainly developing countries as they require the economy boosts. This is done by lowering tax rates as incentives for TNCs to enter. As governments compete, this inadvertently increases TNCs footloose cause they have choices of entering and exiting countries that are desperately fighting over their entrance.
TNCs are NOT Footloose
Some empirical studies has classified TNCs are more footloose compared to domestic companies, meaning that they are more prone to leaving an industry compared to a domestic firms of the same size. (Görg and Strobl, 2003; Bernard and Sjöholm, 2003; and Van Beveren, 2007) The exit process is slowed down though, by TNCs abundance in sources of income. Added by the fact that TNCs are less knowledgeable about the business environment and have to encounter unexpected barriers, they can afford to make losses initially and try to claw back those losses. Unless the losses are too much and hard to bear; only then these TNCs decide to leave the country. Therefore, it is debatable that TNCs are not as footloose as people think they are.
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