TMJC 2025 J1H2 C1 Lecture 2 Transnational Corporations

1 H2 Geography Cluster 1: Lecture 2 TMJC 9173 Transnational Corporations 2025 (A) WHAT IS A TRANSNATIONAL CORPORATION (TNC)? A transnational corporation (TNC) is a firm that has the power to coordinate and control cross-border operations in more than one country, even if it does not own them. (B) WHAT ARE THE CHARACTERISTICS OF TNCs? Although TNCs are highly differentiated in size, geographical extent and the way it operates, there are characterised by some basic characteristics: A TNC has the ability to coordinate and control various processes and transactions within transnational production networks, both within and between different countries. A TNC has the potential ability to take advantage of geographical differences in the distribution of factors of production (for example, natural resources, capital, labour) and in state policies (for example, taxes, trade barriers, subsidies, etc.). A TNC is footloose – It has potential geographical flexibility meaning it has an ability to switch and to re-switch its resources and operations between locations at an international or even a global scale. This ability a. Depends on the nature of the TNC, and b. Changes over time. Because of these characteristics, TNCs have profound impacts on the changing geography of the global economy through its decision to invest, or not to invest, in particular geographical locations. (C) WHY DO TNCs ENGAGE IN TRANSNATIONAL OPERATIONS? Although each firm may have its own reasons for wanting to engage in transnational operations, in general we can classify them into two broad categories: market factors and asset factors. (i) Market Factors Firms invest in overseas markets (e.g. production, marketing, sales) due to several reasons such as the (i) size, (ii) demand and (iii) accessibility of the market. A market with a large size of population having a high income level would be more attractive to a firm as they have potentially more customers. In addition, firms would also invest in markets where there is a demand for its goods. Finally, firms invest in overseas markets to improve their accessibility to the market such as minimizing the cost o f transportation and overcoming trade barriers. For example, to tap on the increasing automobile market in India, Suzuki, a Japanese automobile TNC invests in India through a joint venture with Maruti Udyog, an automobile manufacturer in India, to form Maruti Suzuki. (ii) Asset Factors (Exploiting Comparative Advantage) Firms also invest in overseas markets to be located near their sources of supply. These asset factors can be: (a) Access to Natural Resources This could be seen most clearly in natural resource industries, where firms are located near the source of

2 natural/ raw resources. This often occurs in the initial elements of the organisational sequence of a TNC. Often the later stages (e.g. processing of raw material) are located near other assets (e.g knowledge or labour) or markets. An example to illustrate this would be in Shell’s operation. Extraction of oil is done predominantly in Nigeria where there is abundant oil supply. However, oil refining is done in countries such as Singapore where there is available labour and knowledge on oil refinery, as well as, large markets in close proximity to Singapore. However it is important to note that t echnological changes in production processes and in transportation have evened out the significance for a firm to locate nearby natural resources. (b) Access to Knowledge Due to agglomeration of knowledge and technological innovation processes in geographical clusters, the ability to gain traded and untraded interdependencies in these geographical clusters give incentive for firms to location their operations in such locations. Agglomeration refers to the clustering of economic activities in an area. Traded interdependency refers to direct and tangible transactions between firms (especially in intermediate products) Spatial proximity reduces transaction costs. Untraded interdependency refers to less tangible benefits arising from face-face contact, social and cultural interaction, enhancement of knowledge and innovation and tacit knowledge. (c) Access to Labour In the case of labour, factors that firms would consider would include the knowledge and skills, wage costs, productivity of labour, labour ‘controllability’ and labour mobility. (D) HOW ARE TNCs ORGANISED? As discussed above, TNCs are geographically located according to market and asset factors. This is in part based on the structural organisation of TNCs . Different functions within the TNC have different locational needs hence resulting in is distinct spatial organisation in the world. The structural organisation(or spatial hierarchy) of a TNC is generally organised into three major functions:Coordinate and control: by headquarters of a TNC 1. Research and development (R&D): by R&D centres of a TNC 2. Production: by branch plants/ production units of a TNC (E) HEADQUARTERS (HQs) A TNC can have 2 types of headquarters: corporate headquarters and regional headquarters. (i) Characteristics and Functions of Corporate and Regional HQs (a) Corporate HQ The corporate headquarters is the centre of overall control of the entire TNC and is responsible for all major strategic business decisions. One key role of the corporate HQ is financial. It decides on the allocation of the corporate budget between the different divisions within the TNC. Another key role of the corporate HQ is to handle, process and transmit information between different divisions within the TNC, and with outside organizations such as government

3 departments and other business services on which the TNC has dealings with such as finance, legal and advertising. (b) Regional HQ The regional headquarters of a TNC is an intermediate level in the corporate organizational structure, whereby its influence is geographically limited to a particular region. The key role of the regional HQ is to coordinate and control the activities of the TNC’s affiliates within a region such as its manufacturing units and sales offices. Another key role of the regional HQ is that it acts as an intermediary between the corporate HQs and its affiliates within its particular region. Finally, the regional HQs also gather information about the particular region for the TNC. (ii) Spatial Organisation of Corporate and Regional HQs The characteristics and functions of corporate and regional HQs define their particular locational requirement. 1. Connectivity of the Location: Both corporate and regional headquarters need to be located in places where there is a well-developed global transportation and communication network in order to keep close contact with other parts of the TNC in different parts of the world. 2. Accessibility to External Services and Skilled Labour: Both corporate and regional headquarters need to be need to be in places where they have access to high -quality external services (e.g. banks, government agencies) and skilled labour (particularly people skilled in information processing and strategic management). 3. Proximity to Head Offices of Other Organis ations: The activities conducted by the corporate headquarters often involve interaction with the head offices of other organisations. To facilitate face - to-face contact to top executives in other high-level organisations, the corporate headquarters of a TNC tends to also be located where the headquarters of other organisations are . This results in an agglomeration of headquarters within a close geographical proximity. Most corporate headquarters of TNCs are concentrated in their home country (Macro-scale). In addition, corporate and regional headquarters of TNCs are concentrated in global cities (micro-scale) because of their connectivity, accessibility to external services