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Simon Says

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Global Shift: Transnational corporations (TNCs) and societal impacts

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Global production networks (or GPNs) in which transnational corporations (or TNCs) operative in have the potential for enormous impact on the economic development of local and regional economies, and the GPNs and TNCs can create both benefits and/or costs to the inhabitants of these economies. Obviously, these potential impacts encompass numerous complex interactions, which are both direct and indirect, between the GPNs and the local economies. But according to Peter Dicken there are four major areas where we can see the potential impacts of GPNs on local economies and communities (See: Dicken, Peter. Global Shift. Mapping the Changing Contours of the World Economy 6th edition. Guilford Press, 2011).


In this blog post the primarily focus will be on the four sub-points listed under the major areas of potential GPN impact (see image above), which are: capital injection, stimulation of local firms, knowledge diffusion, and the local creation of jobs. Before I continue I would like to add that while I believe Dickens list to be rather wide-ranging and comprehensive, I would’ve liked it to include climate and environmental impacts from GPNs. The degradation of our environment and climate is one of the most pressing issue of our time and it’s an issue that affects all parts of human life. Its sources and effects are not just confined to specific regions or local communities – it’s a global problem that requires global solutions. And because TNCs, as Dicken himself writes, “are responsible for much of the shaping and reshaping of the global economic map” they are very much contributing to its negative effects. As such, they also need to be included in its solutions.

The first point, which involves the inflow of capital to local economies from foreign investment, might be one of the more obvious impacts. These capital injections can help and energize the economies of both developing and developed nations that are suffering from capital shortage. But even here the dimensions of capital injection are both numerous and multifaceted, just consider the following. Not all foreign investments by TNCs into the overseas host economy involves the actual transfer of outside capital from external markets. This means that the TNCs mode of entry – which is (among other things) either the acquisition of existing firms or the establishment of new firms – can be solely financed by local money. And even where outside capital does flow into the local economy the flow will eventually be reversed, and could in time exceed the inflow, as the local firm sends its profits back to the parent company and its home economy markets, often by using various legal loopholes and tax evasion techniques that lessen their economic responsibilities to the host-country. This in turn can create problematic questions on the host-country’s ability, and willingness, to properly tax the foreign-controlled firms on the profits its local operations results in. An example of this can be seen in the controversial Apple tax case between Ireland and the European Union last year.

5a4e1d5ce9f8b_GarmentfactoryworkersinLaoPDR.thumb.jpg.b97670f73454d05a9b06ac4c79077d30.jpgGarment factory workers in Lao PDR. Photo by: ILO in Asia and the Pacific (cc)

Local firms can be stimulated, in various ways, by its involvement in a GPN, but only if the TNCs actively work to create positive connections within the host-country’s economy. For example, TNCs can work together with local suppliers and demand their orders meet stringent specifications which can raise the technical expertise in these local firms. By sourcing its materials locally, TNCs can also indirectly help create new domestic firms to meet the new demand created, thus additional employment is created. Much of this depends on the nature of the GPN operation as well as the function and attributes of the TNCs. TNCs that mainly serve the host country are more likely to create these required positive linkages with the local economy than those TNCs who has an export focus that mainly serve the home market of the TNC. The nature and characteristics of the local economy also plays an important part. Compared to developing countries, it is easier for more industrialised and developed countries to implement various policies that can help upgrade local suppliers and increase the local linkages between the TNCs activities and the local economy.

To what extent does GPNs and TNCs result in knowledge diffusion? Merely by establishing an overseas operation, the TNC contributes to the transfer of knowledge from its home country to the new host country as it employs local labour and engage in training these in the specific skills and techniques required. But the transfer of more advanced technologies from TNCs to developing countries is generally minimal. And even when such transfer does happen it does not necessarily mean that the technology will be beneficial and widely diffused throughout the host country. This is mainly because TNCs tend to inhibit the spread of its proprietary technologies beyond its organizational core in their home country, or in more advanced industrialized countries. In fact, very little of TNCs research and development facilities are located in developing countries. It’s usually only when the host country is capable of pressuring the TNC to establish certain research and development facilities in exchange for entry to its local market that such establishments in developing countries happens, which again brings us back to the nature of the local economy and how a country’s social, political, and geographical characteristics are all important factors for its people, government and local firms in a globalized world.

There exist further obstacles, beyond these characteristics, for local firms to upgrade – their process, products and functions – and advance within GPNs. Local firms face higher and higher entry barriers to the more lucrative and profitable parts of GPNs, such as marketing and research and development. The geographical proximity could also hamper upgrading for local firms located far away from the TNCs core organisation. And even when there are successful upgrades there is a risk of differential effects, such as workers’ displacement due to new efficient and/or obsolete processes, among other things. Workers also face the risk that the extra value from industrial upgrading might not reach them in form of higher and better wages. These gains may also be spread unevenly among different groups of workers with the more vulnerable groups such as guest workers being among the hardest hit. A country’s upgrade process could also lead to more restrictive labour laws and the suppression of workers’ rights and unions.

So, what about the fourth and last area namely employment creation, which tend to be the most important issue for most governments and ordinary people? Do GPNs create jobs in the local economy, and are they good jobs? Again, it’s difficult to say anything definitive because there are numerous factors in play that one need to consider. For example, the number of direct jobs created depends on such issues such as the scale and the technological nature of the TNCs local operation. And the number of indirect jobs created depends on how many positive linkages have been established with the local economy and how much of its profits are retained within its host country. It is also a possibility that the GPNs have adverse effects on other local and competing firms so that local jobs will be lost. As previously explained, TNCs tend to focus their research and development facilities in its own home country and other developed and highly industrialised countries, therefore the overwhelming majority of jobs created in developing countries from GPNs are low-skilled and low-paying production jobs. With that said, TNCs tend to pay the average or even above the average salary-levels in the host country. But this is generally only the case with local affiliates that are directly connected to the TNC as they do not have the same control with their independent and third-party local suppliers – which are usually the primary source of labour complaints directed towards TNCs. Examples of this can be seen with H&M’s use of “strategic suppliers” which has caused severe and deadly workplace accidents over the years. Confronted with heavy criticism, many TNCs resort to the implementation of various ethical codes of conducts which themselves and their suppliers must follow.

5a4e1bae91e07_MakingIKEAchairsinAsia.thumb.jpg.68b2b9e906a18302c82cee0bc8185c30.jpgA worker sprays stain onto components that will form the “Stefan” chair sold by Ikea in 2015. Photo by Province of British Columbia (cc)

IKEA with nearly 400 stores in 48 different countries is one of these TNCs with a code of conduct for their operations, some of their regional offices have also published yearly sustainability reports that give more detailed information about the progress of the firm’s social and environmental goals. IKEA’s code of conduct is called the IWAY Standard and contains minimum requirements for social, working and environmental conditions that need to be met by their local suppliers when IKEA purchases products, materials and services. Among other things, the IWAY prohibits the use of child labour and forced labour. The code of conduct also says that workers need to be free to unionize and that they should at least be paid minimum wages and have the right to overtime pay. The IWAY standards also encourages safe and healthy working settings that reduces stress to the local environment, prevent emissions to air, land and water, as well as efforts to reduce energy consumption. Unfortunately, the content of the code of conducts only affects IKEA suppliers, and not those who are employed directly by IKEA in their stores and in other parts of the firm. This omission in their code of conduct seems insufficient, to say the least, especially considering some of IKEA’s more recent scandals – such as the revelations that IKEA systematically spied on its employees in France and how they actively work against unions in North America, at their own stores and at IKEA-owned factories. There have also been reports over the years on how IKEA’s suppliers have exploited child labour in Asia and India, used forced labour in Europe, and clear-cutting forests in environmentally sensitive areas. IKEA is also constructed in such a way that it can use various legal loopholes and techniques to minimises both tax and public disclosure on their profits.

Various codes of conducts are clearly not enough to reach greater social responsibility from TNCs. But they are a step in the right direction, and definitely better than nothing. Together with efforts from various NGOs and sufficient media coverage they can help push TNCs in the right direction and lessen the negative effects of GPNs on local communities.

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