Section 3

The Impact of Global Business Activity

• PART 1: Introduction

• PART 2: The Impact of TNCs on the Host country

• PART 3: The Impact of TNCs on the Home country

• PART 4: The Broader Socio-Political Impact of TNC Activity [not covered]

PART 1: Introduction- The Issues

PART 1: Introduction- The Issues

TNCs operate in

• HOST COUNTRY(IES) where subsidiaries are

• HOME COUNTRY where firm was ‘born’

Do TNC’s ECONOMICALLY benefit host and home countries?

• Create more jobs/more economic growth?

Issues in more detail:

PART 2: Do HOST countries benefit from TNCs in them?

 Must identify ways TNCs benefit/harm the host

 Depends if host is rich/poor

PART 3: Does HOME country benefit from TNCs in them?

 Does TNC overseas investment = capital not invested at home?

 Does TNC overseas investment = more jobs at home?

PART 2: The [Economic] Impact of TNCs on the Host country

• 2.1.Capital and Finance

• 2.2.Technology

• 2.3.Trade and Linkages

• 2.4.Industrial Structure and Entrepreneurship

• 2.5.Employment and the Workplace

• 2.6. Overall Impact

 2.1. Capital and Finance

-TNC market power rises

+G
ovt
ma
-
y
Red
red
uces
uce
tax
bus
reve
EXPLANATION ines- Transfer pricing
nue
s
TNCs often
tax
es between operations
..transfer resources

..using ‘transfer pricing’

..in a way that

..allows them

to avoid corporation tax

PROFIT £100M
TAX RATE 50%
TAX = £50m
Argument 2

PROFITS FALL
TO £10M
TAX PAID@50%
=£5M
2.2.Technology

Technology = "the systematic application of scientific or other organised knowledge to practical tasks" (Galbraith
1972: p. 31)

ISSUE 1 How far is technology transferred by TNCs?

ISSUE 2 How appropriate is the technology?

ISSUE 3 What are the costs to the host economy of acquiring the technology?

1/TNCs can involve themselves in the host economy in various ways

• [a] foreign direct investment

• [b] collaborative ventures

• [c] international subcontracting

= Possible channels for technology transfer

 But how far is technology diffused?

 How far is technology diffused by TNCs?

 è Is technology made available to external potential users directly (through links with domestic firms)?

 è Is technology made available indirectly (through 'demonstration effects')?

2/The nature of the TNC may prevent even indirect diffusion: 

• TNCs often transfer "know how" , not “know why” knowledge.

• TNCs often keep technology- creating (R+D) activity in their home country.

• Any R+D activities located outside home country tend to be 'support labs' only

Support lab? [SEE SECTION 2 (2.2.2) FOR DETAILS]

=type of TNC research + development lab that

• Adapts parent technology to local market

• Gives technical back-up

It DOESN’T

• Develop its own technology for its local market or for the TNCs global market

ISSUE 2: How appropriate is the technology?

This is less of a problem for rich countries.

A big problem for poor countries

Three problem-areas:
1-Rich world capital intensive technology

Labour intensive technology would be more suitable for poor countries.

How far do TNCs adapt their technologies to suit needs of poor country hosts?

2-Rich world products

TNCs products are highly

• differentiated

• packaged

• promoted

TNCs then sell these…

to a small elite of relatively high income people in the host country

3-Unsustainable and unsafe technologies

Evidence:

some TNCs have shifted production to low wage, low regulation countries to ‘legally’ use unsafe/unsustainable
technologies there.

Dicken: No evidence that this is a general pattern.

ISSUE 3: What are the costs to the host economy of acquiring the technology?

Difficult to establish such a 'cost'

• Technology is one part of a 'package' of things the TNC brings to the host country.

• This 'cost' would have to be measured against cost of alternative ways of getting the same technology

– buying it from its owner OR

– producing the technology domestically

2.3. Trade and Linkages

TNCs affect the host country's trade with the rest of the world by having 3 effects:

• increasing host country exports - good for host

• enabling import substitution - good for host

• increasing imports into the host - bad for host

EXPLANATION: Import Substitution

Net impact of the 3 effects on the host?

Net effect here matters

Extent of Linkages

How far are the TNCs operations integrated into the local economy with (backward) linkages to domestic firms?

Backward linkages...

What influences whether a TNC will create backward linkages rather than import?

1-TNC STRUCTURE AND STRATEGY

• vertically integrated?

2-CHARACTERISTICS OF HOST ECONOMY

• rich economy vs poor economy

• big market vs small market 

3-TIME TNC HAS BEEN IN A COUNTRY

Quality of Linkages
Dicken (2007: ch 16) compares

“Dependent" local economy structure

èLow quality backward linkages

vs

“Developmental" local economy structure

èHigh quality backward linkages

Attribute Dependent local economy structure Developmental local economy structure

Form of local linkages Unequal trading relationships. Collaborative relationships, mutual

learning.
Conventional subcontracting.
Basis in technology and trust.
Cost reduction emphasis
Added value emphasis.

Duration /nature of Short term contracts Long term partnerships

local linkages

Degree of local Weak: branch plants only do final Deep: high investment level,
embeddedness of assembly decentralised, multi-functional
investors

Benefits to local firms Markets for local firms to make Markets for local firms to develop and
standardised, low technology parts. produce own products.

Subcontracting restricts independent Transfer of technology/skills strengthens

growth. local firms.

Local economic Vulnerable to external forces and to Self sustaining growth via cumulative
prospects 'distant' corporate decision making expansion of linked firms

Quality of jobs created Mainly low skilled, low wage. Higher skilled, higher wage

May be high level of casual jobs. jobs.

2.4.Industrial Structure and Entrepreneurship

 TNC could bring benefits:
if there are substantial local
linkages, then this increases
opportunities for local firms
as suppliers
2.5.Employment and the Workplace

Several issues:
if managerial staff leave the
1-What is the total impact on jobs in the
TNC and set up their own
host country
businesses, then this can
2-What sorts of jobs are created
increase the chances of new
3-What will the levels of pay be like
firm formation locally
4-What will the TNCs relations with its workers be like

1-Total Impact on Jobs

1.There are jobs that are 'displaced' (JD)

 
2.There are direct jobs (DJ) created in a
plant.

Numbers depend on
scale of activity
nature
2-Types of created
of jobs technology used (capital or
labour intensive)
 most jobs are production
3.There are indirect jobs (IJ) created.
based - making things.
Numbers depend on
Jobs
extent of often in EPZs, low
local linkages
amount
level, offemale TNC income generated and
labour.
retained in host economy
Some jobs are being
upgraded but mixed
EXPLANATION
Export Processing Zones (EPZs)
progress on this.
 Suppliers 2 suppliers 2

Brief History of EPZs

• Started in 1964 by UN to promote trade with developing countries.

• By 1970 there were EPZs in 10 countries.

• Took off in 1980s with India offering tax breaks for corporations manufacturing in its low wage zones.

• EPZs exploded in the 1990s - spread to the Philippines and China

China has the largest pool of EPZ workers in the world: 18m out of a total world EPZ pool of 27m. (Buckman 2005:
ch 5).

wages can be very

low
conditions can be
very poor
4-Labour relations

Many TNCs don’t recognise unions unless National Govt. of host country requires it

Remoteness of TNC decision making makes TU organising against closures harder

 Recently:

TNCs say they don't

• ICFTU - global union links formed

• EU Social Protocol 1993 - workers have right to information and consultation on matters affecting more
thanhave control
one EU member state

over
2.6. Overall impact these firms

In general, Dicken argues that:

1.Net economic impact of TNC on host depends on context

2.A high level of TNC involvement in a economy is probably 'bad' for that economy

PART 3: Economic Impact on Home Country

1/Suppose a firm decides to increase investment overseas (i.e. increase fdi).

How will this affect the home (domestic) economy it is based in?

 Three issues

ISSUE 3: How are home country jobs

affected?

ISSUE 1: Would this investment have been made at home instead?

overall impact is
ISSUE 2: How are home country exports negative:
affected? overseas
One possibility Alternative possibility
investment
diverts capital
from use at home
Other domestic firms ...rival TNC could take the market
and displaces
domestic exports

ISSUE 3: How are home country jobs affected?

 TNC overseas
investment
preserves jobs
at home.
The overall impact on employment in its home country of a TNC that invests overseas can be summarised as
follows:

• EXPORT-STIMULUS EFFECT [XE]

•   HOME-OFFICE EFFECT [HE]
•
•
Assumption: none
 SUPPORTING FIRM EFFECT [SE]
 PRODUCTION-DISPLACEMENT EFFECT [DE]

Ist -EXPORT STIMULUS EFFECT [XE]

of the overseas
2nd –HOME OFFICE EFFECT [HE]

activity could
have been kept
at home. Creates jobs in HQ
Creates jobs [XE] [HE]

3rd – SUPPORTING FIRM EFFECT [SE] 4th –PRODUCTION DISPLACEMENT EFFECT [DE]

F2 Kill off exports

Overall the net employment effect of overseas investment on the home economy is:

Net employment effect

= XE + HE + SE less DE

[note: Dicken 2007 p. 458 mistake here]