GCSE Geography | Reducing the Development Gap: TNC Investment (Development Gap 13)

There are a number of strategies that can be used to reduce the development gap. One such strategy is TNC investment...

Transnational corporations (TNCs) are large businesses that operate in a number of countries. They usually have their headquarters in HICs, and the majority of production in LICs or NEEs where costs are much lower. They are also known as multinational companies (MNCs).

TNCs often separate their production between various locations, or have their different divisions – Head Office and Administration, Research and Development, Production, Assembly, Sales – separated around a continent or the globe.

Many TNCs have become synonymous with globalisation such as Nike, Facebook, Apple, Netflix, Uber, Amazon, Google and Samsung. The biggest 500 TNCs together account for nearly 70% of the value of world trade.

Why do TNCs choose to operate in more than one country?

There are a number of reasons that TNCs choose to operate around the globe...

Operating in more than one country lowers the risk of things that may affect production, such as union disputes, government instability, supply disruptions and financial uncertainty - if these occur in just one country they are unlikely to disrupt overall production, as production can be switched to alternative plants relatively quickly if needed.

Operating in other countries also helps to maximise profits...

• Many TNCs choose to do their production in LICs and NEEs where wages are much lower. Wages are often the single largest cost for a firm, so locating production in low-wage economies can maximise profits immediately
• Some TNCs choose to locate in countries with low business tax - if they register their profits there they can ensure that they pay minimum tax. Many TNCs locate in Ireland for this reason as they charge 12.5% tax, compared to 20% in the UK
• Some TNCs choose to locate to avoid trade tariffs and tax barriers. Some Japanese car firms set up plants inside the EU to avoid import taxes being imposed on cars from Japan
• Some TNCs choose to locate in countries where businesses are subject to much less regulation, for example, fewer laws governing employment rights, trade union rights and environmental protection

TNCs play an important part in reducing the development gap. If TNCs manufacture goods in NEEs or LICs they will pay far less for their labour costs, which then means that their products can be made much more cheaply, and therefore the price of the product falls - which is good for consumers too. In addition, moving to other countries means a bigger market for selling products too, enabling TNCs to expand further.

One of the reason that TNCs are so important in reducing the development gap is that they trigger the multiplier effect. This is an upward spiral of the economy and its benefits on employment. Positive multipliers are often triggered by a large investment, such as the opening of a new factory. TNCs can bring huge benefits to LICs and NEEs as you can see in the diagram below...

The multiplier effect

When an TNC opens a new branch in an LIC or NEE it creates many jobs directly, for example, people working in garment factories for global sportswear companies, at the same time jobs are created within local firms that supply the TNC with parts of services, such as maintenance, as there is increased demand. These will both lead to local people earning more so they can afford access to health care and education, but they might even start to have a disposable income, enabling them to spend more money in local businesses, such as in cafes and shops. This means that those local businesses may have to advertise for additional staff because the number of customers has increased. As businesses expand they may end up paying more tax, and in fact the jobs that are created are likely to be formal jobs, meaning that the workers also pay tax. More taxes being paid means the local government has more money to spend on improving infrastructure and services, such as schools, hospitals, water supply, sanitation, etc. New infrastructure and services, along with a strengthening economy, will make the area seem attractive to overseas firms, so a TNC may decide to open up a new branch, and the whole cycle starts again.

Benefits of TNC investment

Job creation

TNCs can play a huge part in developing the economy of LICs and NEEs and help reduce the development gap. TNCs create many jobs, and these jobs are often better paid and more reliable than what was on offer before, such as seasonal farming. They may come with training and education, such as in ICT or learning to speak another language.

Community investment

Sometimes the company will invest in facilities that improve the quality of life for local people, such as healthcare or schools, or clean water supplies, which will also make the company look good. TNCs also have to pay taxes to the government of the host country, this creates much needed revenue to spend on development projects or funding vital services such as health and education.

Infrastructure investment

TNCs will often fund infrastructure improvements, such as new roads, railways, etc. These will help them trade more easily, but will also benefit local people and at the same time potentially attract further investment in the future, increasing GNI further.

Drawbacks of TNC investment

Environmental issues

However TNCs locating in developing nations is often controversial. Relaxed environmental laws mean that TNCs create a lot of pollution, such as toxic chemicals being released into waterways, or released into the air through burning things like rubber. They are often not prosecuted for these environmental crimes, or if they are, it can take a very long time to admit liability and pay to clean up the damage. A good example of this is the Bodo oil spills of 2008 and 2009 which devasted farmland and fishing waters in the Niger delta in Nigeria. It took until 2015 for Shell Oil to agree to pay £55 million in damages, as well as clean up the swamps and fishing grounds.

Exploitation of workers

Conditions in factories in LICs or NEEs can be harsh. People work long hours for low pay, often in dangerous conditions, a notable example of this would be the Rana Plaza disaster that occurred in Dhaka in Bangladesh in 2013, where a building that was home to many factories making clothing for TNCs, collapsed in killing 1134 people (see the image below). Today the garment workers affected are still campaigning for justice and compensation, and safer working conditions in factories.

Economic leakage

TNCs also have economic leakage, where most of the profits are sent abroad benefitting shareholders mainly. The best paid jobs also tend to go to people from the origin country, rather than those where an branch has been set up.

Political influence

TNCs can exert pressure on governments and can leave without warning so governments find them hard to control, and they often bribe political parties through financial contributions. If production costs increase they may move elsewhere, which can trigger a negative multiplier effect.

Over-abstraction

TNCs can also monopolise natural resources, which has been seen in Kerala, India, where local people in have protested against Coca Cola, angry that they had extracted too much groundwater, causing wells to run dry, which led to no drinking water and no water for irrigation, and had a huge impact on farming.