May 2, 2016    5 minute read

The Phenomena of TNCs and Globalisation: A New Era?

   May 2, 2016    5 minute read

The Phenomena of TNCs and Globalisation: A New Era?

In the 21st century, we have come to see the integral part TNC’s and globalisation play in the operation of the world economy. A TNC to some degree coordinates and controls operations across national boundaries. With this forming the foundations of what a TNC is, we can go onto explaining their existence through economic theory.

The 1950’s to 70’s saw the significant period of TNC growth, however as Stephen Hymer suggested, it was initially the industrial revolution which kick-started the emergence and existence of these firms as the small-scale capitalist enterprises were the driving force who had the strength to reap the benefits of co-operation and division of labour. Such corporations were mainly European based and included the mighty Nestlé and British American Tobacco, thus paving the way for the dominant role TNC’s play in our modern world. This evolution was led by American firms and was viewed as a threat in Europe hence the ‘American Challenge’ Hymer argued that the possession of ‘firm-specific’ assets/advantages developed in the domestic market could then be transferred across borders geographically, to foreign locations, but inside the firm i.e. internalised. These assets could be in the form of economies of scale, market power, brand names, or technological expertise.

One theory is the conventional view that there is a sequential path from a domestically orientated firm to a TNC. This can be shown diagrammatically as follows:

Source: Global Shift 7th Edition, Peter Dicken.

Source: Global Shift 7th Edition, Peter Dicken.

However, the sequential path may not necessarily have to be followed as the diagram shows that ‘short circuits’ and ‘parallel pathways’ may occur. For instance, some stages may be cut out of a firms’ road to becoming a TNC. This is most common amongst firms from small countries such as Switzerland whereby within five months of its creation, Nestlé was already manufacturing abroad.

Increasingly, companies can engage in a myriad of collaborative arrangements with other firms, therefore providing further diversity to TNC expansion. A distinction from a modern corporation to TNC is also now able to be made whereby the latter is a new corporate form having the flexibility to enter new markets quickly. The ‘Eclectic Paradigm’ theory informs us the conditions which need to be present for international production. Firstly, the firm must possess ‘ownership-specific’ advantages, not possessed by competing firms such as comparative advantage – an aspect the UK is a great advocate of in financial services. Secondly, there must be ‘location-specific’ advantages to exploit the firm’s assets in foreign establishments. Finally, there must be ‘internalisation’ advantages to the company from exploiting it themselves, rather than selling them or leasing them. With these conditions being met, a firm can then go on to obtaining the benefits of globalisation and internationalisation in product/service markets, again facilitating them with being a TNC.

What impact has globalisation had on the world?

The phenomenon of globalisation affects the economy and businesses in various ways, having been subject to changes at some point in time. These changes can be related to increasing competition in world markets along with the rapid advances in technology and information transfer. This competition could be regarding product/service or cost and price, whereby the market share can be increased with lower costs and prices due to meeting consumer needs and wants considering the immense multitude of choices they possess. The use of new technology to be able to exploit new business opportunities is also a major revelation due to our evolving world, whereby e-commerce procedures give the potential for SME’s to break into international markets. It is evident that globalisation has increased the speed of technology transfer and will continue to do so as it develops, thus helping companies meet consumer market expectations. Information transfer is an expensive but extremely valuable asset to a company as it helps them adapt to this changing global economy and shape the future of their company accordingly.

Some additional implications of globalisation for business include the fact that it allows for a rapid expansion of outsourcing/offshoring of production; making supply chains more international and giving them access to larger markets along with benefitting from economies of scale. This enables them to be more cost effective and is an efficient method of getting the product to its consumers. Furthermore, there can be an ‘urge to merge’ due to the global deregulation of capital markets making it easier to achieve mergers/acquisitions, thus encouraging the external growth of business. Potential issues, for instance, threats to our manufacturing industries; lost jobs from outsourcing and structural unemployment may arise. Although due to factors such as FDI, in the long-run, increased trade from globalisation is likely to lead to the creation of more employment in all countries involved.

We have seen the development of TNC’s from its embryonic stages to being a global giant with over 100,000 TNC’s present by 2010, General Electric of the US being the largest. The fact that most TNC’s have grown, mainly through mergers and acquisitions, the attraction of an already functioning business compared to those starting from scratch is ever-present. This is how developing countries such as China and India take advantage of globalisation and are creating a new generation of TNC’s thus becoming integral global players, for instance, China’s Lenovo acquiring IBM’s PC business and India’s Tata Group securing Jaguar Land Rover from Ford.

The future seems bright. Could this mean the start of a new era of TNC’s and globalisation?

Quite possibly.

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