Economic Globalization

Summary:

Peter Dicken, the writer of Economic Globalization: Corporations, explains depiction and explanation of the nature and significance of transnational corporation(TNC) in the era of economic globalization in five categories.

 

THE SCALE AND GEOGRAPHICAL DISTRIBUTION OF TRANSNATIONAL CORPORATIONS

 

The ancestors of today's global trading and service companies are chartered trading companies like the East India Company and the Hudson's Bay Company, which emerged in Europe after 15th century.

However, the first company which engage in manufacturing production was emerged in the latter half of the 19th century. After the World War I, especially during past 50 years, the number of TNCs in the world economy has grown exponentially. The most comprehensive definition of a modern TNC is ‘a firm which has the power to coordinate and control operations in more than one country, even if it does not own them’. These are global corporations, the 'placeless' giants whose operations span the globe and which owe no allegiance to any particular country or community. TNC has all forms from global corporations operating in scores of countries to TNCs operating in only one or two countries outside their home base. Their common feature is that they operate in different political, social and cultural environments.

TNC activity is conventionally measured using statistics on foreign direct investment (FDI). ‘Direct’ investment is an investment by one firm in another with the intention of gaining control over that firm’s operations. During the past two decades, FDI has grown at an accelerating pace and it's growth has consistently outpaced growth of world trade. This is a clear indicator of the increasing significance of TNCs as the leading integrating force in the global economy. There is an increasing diversity of TNCs in the global economy.

WHY (AND HOW) FIRMS ‘TRANSNATIONALIZE’

1. MARKET-ORIENTED INVESTMENT

Much of their investment continues to be market-oriented. A firm may have reached saturation point in its domestic market. Or it may have identified new markets that require a direct presence in order to serve them efficiently. Like this both the size and the particular characteristics of markets continue to influence the locational decisions of TNCs.

2. ASSET-ORIENTED INVESTMENT

The assets that firms need to produce and sell their products and services are also geographically very unevenly distributed and, therefore, may need to be exploited in situ. Assets like human resources are very unevenly distributed geographically. It is really only in the past 50 years or so that these kinds of assets have come to play a significant role in transnational investment. n particular, it is increasingly the availability of well-educated, highly skilled and strongly motivated workers located in ‘quality’ communities that are exerting a very strong influence on TNCs.

3. Modes

There are two major ways in which firms develop transnational activities: one is through what is known as ‘greenfield’ investment; the other is through engagement with other firms, through either merger and acquisition or some form of strategic collaboration. Many firms, especially US and UK firms (though not only these) have preferred to merge with, or to acquire, another firm to establish, or to expand, their presence in a particular overseas location. Another widely used mode of TNC expansion is to enter into a strategic collaboration with one or more other firms. Many companies are forming not just single alliances but networks of alliances, in which relationships between partner firms are increasingly multilateral, rather than bilateral, polygamous rather than monogamous. Advocates of strategic alliances claim that by cooperating, firms can combine their capabilities in mutually beneficial ways. Critics point to the potential risk of losing key technologies to competitors. 

A sequence of TNC development?

First, overseas markets are served by direct exports, normally utilizing local independent sales agents.

Second, as local demand grows, it may become desirable for the TNC to exert closer control over its foreign markets by setting up overseas sales outlets of its own. This may be achieved either by setting up an entirely new (greenfield) facility or by acquiring a local firm (possibly the previously used sales agent itself).

The nature of TNC networks in general is a critical influence on the potential for development of firms seeking to operate beyond their home territories.

GEOGRAPHY MATTERS: THE EMBEDDEDNESS OF TRANSNATIONAL CORPORATIONS

Contrary to much of the received wisdom on the global economy, place and geography still matter fundamentally in the ways in which firms are produced and in how they behave. All business firms, including the most geographically extensive TNCs, are ‘produced’ through an intricate process of embedding in which the cognitive, cultural, social, political and economic characteristics of the national home base play a dominant part. TNCs, therefore, are ‘bearers’ of such characteristics, which then interact with the place-specific characteristics of the countries and communities in which they operate to produce a set of distinctive outcomes. There are inherent obstacles to convergence among social systems of production of different societies, for where a system is at any one point in time is influenced by its initial state. Systems having quite different initial states are unlikely to converge with one another’s institutional practices.

‘WEBS OF ENTERPRISE’: TRANSNATIONAL PRODUCTION NETWORKS

All business firms are constituted as, and embedded within, highly complex and dynamic networks of production, distribution and consumption. Such networks have become increasingly extensive geographically and controlled – or, at least, coordinated – primarily by transnational corporations. By the very nature of their dispersed geographical spread across different political, cultural and social environments, TNCs are far more difficult to coordinate and control than firms whose activities are confined to a single national space.
In addition to the question of a TNC’s organizational architecture there is the related, though not identical, issue of the geographical configuration of its activities. Developments in transportation and communications technologies, as well as in production process technologies, have facilitated the transformation of the geographical extent over which a TNC can separate out its different functions as well as their precise geographical configuration. Because different functions – administration, R&D, production, marketing, sales – have different locational requirements, and because these requirements can be satisfied in different types of location, TNCs tend to develop distinctive spatial patterns for each function. Hence, their internal corporate division of labour is expressed in a distinctive external division of labour, although such patterns show enormous variation between different types of TNC and also between different industries.
Changes to a firm’s geographical configuration often occur as a result of the firm’s decision on what to produce for itself, in-house, and what to externalize to independent suppliers. The ‘make or buy’ decision has become particularly critical as competition has intensified and as firms strive to increase their efficiency to enhance or maintain profitability. TNCs, therefore, are highly dependent on other firms for many of their needs.
All the elements in transnational production networks are regulated within some kind of political structure whose basic unit is the national state. International institutions exist only because they are sanctioned by national states; sub-national institutions are commonly subservient to the national level, although, of course, the situation is more complex in federal political systems.
TNCs do not always possess the power to get their own way, as some writers continue to assert. States still have significant power vis-à-vis TNCs, for example to control access to their territories and to define rules of operation. In collaboration with other states, that power is increased (the EU is an example of this). So, the claim that states are universally powerless in the face of the supposedly unstoppable juggernaut of the ‘global corporation’ is nonsense; the question is an empirical one. TNCs may be powerful – but they do not possess absolute power.

What was interesting/what did you learn:
It was interesting to explain why the TNC came up. It was also impressive that the beginning of the TNC appeared earlier than I expected.

I have a perception that the TNC was an international company, so it was interesting that the TNC was also geographically constrained.

Discussion Point:
What are some examples of political structures that regulate TNC?