Transnational Corporations Multinational Corporations Have Complex Relationships

Transnational Corporations

Multinational corporations have complex relationships to local development processes in the context of the globalization of production systems. Identify some of the major conceptual issues in framing these relationships, and some of the principal types of relationships between MNE and spatially delimited territories such as cities, regions, metropolitan areas and nations that exist today.

The creation of relationships between multinational corporations ("MNE") and local development processes has been explained through several micro-level approaches to understanding the internalization of economic activity using a firm specific approach (Dicken 2003, p. 202). The wide variations in the characteristics and behaviors of transnational corporations ("TNC") of different source nations require the consideration of the diversity of the world's population (Dicken 2003, p. 202). There are several theories that explain why companies become global, including Hymer, Vernon and Dunnings theories, but these theories do not all explain how globalization occurs (Dicken 2003, p. 207).

There are two main types of global production that companies follow: market oriented production and asset oriented production (Dicken 2003, p. 208). Market oriented production is a form of horizontal expansion in which a company invests in manufacturing and service industries to serve a particular geographic region (Dicken 2003, p. 208). The two important characteristics of the local market considered for expansion are size (in terms of per capita income) and the markets structure of demand (Dicken 2003, p. 208). Because per capita income varies greatly in different areas of the world, having the highest population of persons is not an indicator that the country has consumers who are able to pay for the goods produced (Dicken 2003, p. 208). As the per capita income of the population rises, so does the demand for goods and services (Dicken 2003, p. 208). Growing markets where the per capita income is increasing indicates a need for goods and services above the subsistence level.

Asset oriented production is based upon the concept that various assets of the firm needed to produce and sell products are located in the same quality and quantity everywhere (Dicken 2003, p. 209). Natural resource firms must, by necessity, locate at the source of supply and the initial investments in the location by those firms are the first steps in the creation of vertically integrated operations, whose later processes may be distant from the source of the supply itself (Dicken 2003, p. 209). The relationship this type of company would have to the cities and regions nearby would be the need for a supply of labor to work at the supply facilities and for transportation related labor. A country with poor infrastructure may require additional investments for roads, trucks and other methods to move the supply to processing facilities. If the country is willing to invest in building infrastructure as an incentive for the company to create jobs the costs of setting up a facility in that particular location may be more attractive. Labor requirements and costs being the most variable across locations will be evaluated differently depending on the structure of the company. A vertically integrated company with a processing facility in an area of cheap labor may chose to transport raw materials farther distances rather than build facilities closer to the supply because of the cost savings it experiences with cheaper labor. Local and regional political pressures may tax the import or export of a company's products in an attempt to force the building of more facilities and thereby creating more local jobs. In choosing a location for production an MNE must consider the relationships it has with local government and the stability of the government in maintaining the status quo.

Other factors that are considered in the asset production approach are where the product is at in its life cycle and the availability and cost of the technology needed in the production of the product (Dicken 2003, p. 209). If the needed technology is available at the same cost everywhere it will not impact the choice of location of production (Dicken 2003, p. 209). Under the asset production theory, except in the area of labor, the majority of factors considered in production do not influence geographical location as they are evenly available and costs are similar across locations (Dicken 2003, p. 209).

The amount of labor available and the skills and knowledge possessed by the labor in a particular geographical location varies greatly (Dicken 2003, p. 209). The availability of education and the history of the development of the area are factors that determine the educational level of its population (Dicken 2003, p. 209). The differences in education levels also account for the vast differences in wage costs from area to area (Dicken 2003, p. 210). The cost of labor is only one variable in considering the labor productivity which involves a number of influences including education, training, skill, motivation, and the types of machinery and equipment in use (Dicken 2003, p. 210). The labor costs and the costs of production have to be balanced with competing factors, such as changing market conditions and volatile local economies, when a company is considering a location for production (Dicken 2003, p. 210).

The relationships between MNE's and the locations where they operate are complex and the decision to operate in one location over another depends largely on what advantage the MNE has in the particular market in which it operates (Dicken 2003, p. 226). Regardless of what the MNE's advantage is, there will necessarily be some adoption of local practices (social, political or cultural) in order to operate successfully in another location (Dicken 2003, p. 226). The country where the MNE was first developed will have a major impact on how the MNE behaves in other markets, even if it has adopted some local practices (Dicken 2003, p. 227). This is evident when comparing different TNC's embedded in the U.S. versus those in Germany and Japan (Dicken 2003, p. 228). Although all of the TNC's operate globally, their structures and strategies remain consistent with the typical structures of companies in their originating countries (Dicken, 2003, p. 228).