Impact of Transnational Corporations

A transnational corporation (TNC) is a firm that has the power to coordinate and control operations in more than one country, even if it does not own them. There has been a movement of industrial activity from Developed Countries (DCs) to Less Developed Countries, due to the lower production costs in LDCs, allowing TNCs to maximize profits. Less Developed Countries can be further categorized into two different types, namely Newly Industrializing Economies (NIEs) such as China and India, and Least Developed Countries (LDCs).

TNCs have the ability to take advantage of geographical differences and to switch and re-switch its resources and operations between locations at an international, or even a global, scale. Thus, it is undeniable that TNCs have great economic, social and environmental impacts on the host country. However, whether the benefits outweigh the drawbacks depends on the level of the development of the country.

TNCs bring about more economic and social benefits to NIEs but cause more environmental and socio-economic harm to LDCs, where there is a lack of legislative powers to protect workers and the environment from exploitation.

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TNCs provide economic stimulus and create employment in host countries through the multiplier effect and theory of cumulative causation. The injection of capital widens the economic base of the host country. TNCs often help LDCs climb the ladder of economic development. When the host country receives new investment, the economy is able to develop, increasing demand for labour. Increased personal income not only increases standard of living and quality, but it generates higher purchasing power for consumer goods which can lead to the growth and development of service industries as well.

TNCs invest in China due to its labour ‘controllability’, competitiveness and the cheap labour of about US$0.60 per hour for long working hours of about 12 hours. Only one-third of the corporations in China are state-owned enterprises, showing the huge amount of Foreign Direct Investment (FDI) by TNCs in China, which has benefitted them positively as investments of TNCs have helped to lift more than 200 million Chinese out of poverty due to the opportunities for growth. The large scale investments in the research and development industries also lead to a lateral technology transfer to the local population. Tetra Pak, a Swedish packaging firm, used to send an “army” of Swedes around the world to open and manage its factories. But now it is encouraging more local executives to step up into important roles and build up talent and experience in local “clusters”. Thus, there is training and skill acquisition for the locals, leading to technology transfer.

As such, TNCs bring about economic and socio-economic benefits for the host countries. However, the above scenario may just be a wishful thinking. Highly skilled managerial positions are often still dominated by expatriates, leaving only menial jobs for the locals, which are low-paying yet labour intensive. Also, many manufacturing plants are capital incentive so few jobs are provided in reality. Even if they do employ locals, they only employ low grade cheap labour. TNCs often ignore human rights too, exploiting labour. Sweatshop workers often work long hours for very low pay, regardless of laws mandating overtime pay or a minimum wage. Child labour laws may be violated too. One 1981 study of an electronics firm in Asia employing 85 percent women showed that after one year of work, 80 percent of women suffered from chronic conjunctivitis, and the women who assemble microchips often lose their sight after four years.

Similarly in China, the working conditions of the cheap migrant labour is poor as many are cooped up in rooms of high temperatures like those involved in the casting to iron to produce small metal parts. In addition, the lack of intervention of and enforcement of policies by the government of China will result in more harms than benefits for the country. These harsh conditions will definitely outweigh the economic benefits brought about by TNCs to the host countries, and thus TNCs does not necessarily improve the standard of living and quality of life for citizens in the host countries despite the increase in salary. TNCs can also cause significant environmental damage to host countries where environmental laws are not enforced.

In order to attract TNCs to invest in their countries, there would be a reverse auction among host countries, where they try to be less restrictive on TNCs’ operations. Environmental laws are often relaxed despite being present, resulting in over-extraction of natural resources in the host country. In China, there is urban-bias to economic development and a large portion of the land use for farms is being taken over to build factories and facilities. Another example would be in Nigeria, Africa’s leading oil producer. Deforestation, the clearing of land to produce oil and gas for Shell had greatly reduced the local forests used to supply foodstuffs and fuels in Nigeria. Furthermore, Shell uses gas flaring, a practice which burns gas that cannot be collected, leading to huge air pollution. Before 2008, legislation to eliminate this practice is non-existent.

There were also 4000 recorded oil spills since 1960, which exemplifies the little regard for the environment. These negative environmental impacts are also worsened as Nigeria has an oil-based economy, and the large oil TNCs such as Shell had considerable power and influence in this politically unstable country. Therefore, it can be seen that TNCs like Shell bring much environmental damage to host countries, which lack governmental support in terms of negotiating with TNCs for FDI to be tied together with environmental protection practices. TNCs can help to generate wealth and provide jobs for the host country, as the injection of FDI is an economic stimulus for economic development.

However, TNCs may still bring more harm to LDCs which do not have the political clout to establish firm legislative frameworks to protect their workers and environment from exploitation. On the other hand, more advanced economies such as NIEs are more adept in the negotiation process with TNCs and thus bring about maximum benefits for the country. Hence, whether the benefits of TNCs operating in Less Developed Countries outweigh the negative impacts depends on the level of development of the host country.