Are transnational corporations the most influential actors in the global economy?

by Eunoia Junior College

The advent of globalisation has facilitated interconnectivity and integration between economies in the global economy, thus leading to the rise of Global Production Networks (GPNs) across national boundaries that bring together the interactions of different economic actors. Within the global economy, economic actors play critical roles in the creation, enhancement and retention of economic value, and they constantly negotiate within existing structures to make decisions that can potentially influence the global economy. A transnational corporation (TNC) is profit-maximising enterprise which is the lead actor in the control, coordination and configuration of the GPN. Footloose in nature, TNCs possess spatial flexibility and constantly seek a ‘spatial fix’ to find the most profitable combination of capital and labour in its GPN to utilise the comparative advantage of states to the full, having the ability to bring about socio-economic and environmental impacts to both home and host countries. However, TNCs’ influence in governing the global economy can be undermined by the host states’ sovereign power as the regulator of economic activities, which in turn affects flows of capital, labour and goods, and whether TNCs can even operate in those countries. Additionally, TNCs’ influence in governing the global economy can be dampened by non-state actors who serve as lobbying bodies that enact confrontations with TNCs regarding socio-economic issues, thus ensuring checks and balances of TNCs.

TNCs are influential as they are the lead actors in the control, coordination and configuration of the GPN, where they have the ability to coordinate and control cross border operations and stages in a production chain globally. The advent of globalisation has led to the new international development of labour, allowing for the spatial separation of labour functions globally which previously may have been done in the same country. Therefore, it has facilitated interconnectivity, allowing for a dense network of inter-firm and intra-firm linkages to be formed within a GPN, beyond national boundaries. TNCs are the key actors in organising the GPN into 3 functional units that implicate the whole global economy. They practice configuration by deciding where each value-added activity along the value chain should be located, thus creating intra-firm linkages within the GPN in the global economy. TNCs locate their corporate and regional headquarters in areas with high access to high-quality external services, the presence of skilled labour and excellent infrastructural and communications support. For example, BMW is headquartered in Munich, the 3^rd largest city and major business and financial centre in Germany. Meanwhile, research and development (R&D) centres are configured by TNCs to be built in areas with comparative advantages of highly skilled labour and agglomeration of other institutions for science and market research. In BMW’s case, the internationally integrated R&D centre is located in Munich, Germany, while locally integrated R&D centres are located at DesignWorks in California, USA and BMW Group Engineering in Tokyo, Japan, allowing BMW to be more oriented towards other local markets. Finally, TNCs also locate branch plants and production units in countries with comparative advantages of low labour costs, where BMW has branch plants in Jakarta, Indonesia and the BMW CKD assembly plant in Rayong, Thailand. Furthermore, TNCs can control which other global firms can join the network and their roles, thus creating inter-firm linkages within the GPN in the global economy. TNCs decide the suppliers that they work with which provide the key inputs for them. For BMW, the TNC works with suppliers like Bridgestone for their tires in Japan and Guardian for their windshields in the USA. TNCs also engage in subcontracting, engaging independent firms by passing on specific job functions to them, which allows the principal firm to focus more on its core competencies for more specialisation that in turn boosts labour productivity and decreases the cost of production. As such, TNCs are influential by virtue of their powerful ability to coordinate and control cross border operations and stages in a production chain globally within the GPN.

Furthermore, TNCs are influential as they wield massive power in contributing to a range of socio-economic and environmental impacts in home and host countries. TNCs inject foreign direct investment (FDI) into host countries, leading to a process of cumulative causation—encouraging further growth in other sectors of the economy through the formation of backward and forward linkages, which results in a multiplier effect to the host economy. This leads to increased employment, of which TNC Nike employed an additional 30 000 workers in Vietnam. FDI also facilitates the technology creation process, thus allowing for the rise in higher-value manufacturing activities that can enable the host economy to transit its economic structure to a more mature one. In Shell’s case, FDI injected into Nigeria created a multiplier effect—revenue of $15 billion was earned in the host country as a result of Shell’s operations in Nigeria. While there are positive economic impacts experienced by host countries, their negative impacts more often that not outweigh the positive impacts, with host countries facing leakages of profits to the home country as TNCs repatriate profits back to their home country, workers in host countries mostly still engaging in low value-added services and the deterioration of the environment where there were 2976 oil spills into the Niger Delta between 1976 and 1991 due to Shell’s operations in host country Nigeria. Meanwhile, home countries mostly benefit in the long run, experiencing higher profits that are repatriated back to the home country and workers can be upskilled which enables the host economy to produce higher value-added services. Furthermore, home countries would experience less pollution since manufacturing industries would be moved away to host countries. As such, there will be an apparent development divide between home and host countries, with the latter bearing the shorter end of the stick. Evidently, TNCs are shown to demonstrate great power in influencing the spatial developments across space, resulting in uneven spatial developments that often only benefit home economies in the long run. This therefore highlights TNCs’ influential role in governing the global economy through their capacity to engender uneven spatial developments globally.

However, TNCs’ influence in governing the global economy can be undermined by the host states’ sovereign power as the regulator of economic activities and provider of public services, which in turn affects flows of capital, labour and goods, and whether TNCs can even operate in those countries. States may pursue a wide range of economic policies, such as trade and FDI regulation. Some states may try to restrict or ban FDI, meaning that states have the sovereign power to deny TNCs from fragmenting their labour functions to those countries, thus effectively undermining TNCs’ influence over the global economy as states have the right to deny TNCs’ operations in their territories. As such, TNC activities are controlled by the host country’s government policy. Furthermore, as the provider of public services, the state is the main actor in providing infrastructure and amenities. If the state does not provide sufficient infrastructure and amenities such as poor transportation and communication networks, it would hinder firms from carrying out operations and transporting finished or semi-finished products within and out of the country. In the first place, TNCs will not be encouraged to fragment its labour functions to these areas and therefore their influence in governing the global economy may be limited. Ultimately, while TNCs’ influence can be undermined by host states’ sovereign power, TNCs often can reconfigure their GPNs to bypass the state’s regulation, and thus the relationship between TNCs and the host state is usually described as a “command and control” relationship, where the host country usually suffers from a loss of sovereignty in exchange for the promised economic growth by TNCs.

Additionally, TNCs’ influence in governing the global economy can be dampened by non-state actors who serve as lobbying bodies that enact confrontations with TNCs regarding socio-economic issues, thus ensuring checks and balances of TNCs. Through the collective action of non-state actors, they have the ability to disrupt the efficient functioning of GPNs as they are “plugged” into these networks, thus demonstrating their capacity to dampen TNCs’ influence in governing the global economy. Nimble in organisational structure, it allows for more efficient courses of action where they are placed in a good position to monitor the activities of TNCs and add another layer of governance of the global economy. Non-state actors are vocal critics of capitalism and TNCs with regard to the exploitation of labour and resources, and may thus put collective pressure on firms by staging strikes, protests and awareness programmes, should they discover socio-economic issues. A pertinent example would be TNC Zara in 2017, who was lambasted for her bad labour practices. Many workers were left unpaid by Zara’s third-party manufacturer Bravo Tekstil, and their plight was brought to light when non-state actors like the media, Associate Press, reported this whole incident to the world. Furthermore, non-state actors like even the workers themselves collectively launched a Change.org petition demanding compensation for their unpaid wages and voted to unionise, leading to the formation of labour organisations. These actions undertaken by the non-state actors serve to challenge the power and influence of TNCs in governing the global economy, and therefore through collective action of the signing of the petition as well as media exposure of the unfairness towards the workers shown by Zara, non-state actors are able to ensure checks and balances of TNCs and not let any socio-economic issues be swept under the rug, with Zara committing to establishing a “hardship fund” to cover the workers’ unpaid wages. In this light, non-state actors are shown to serve as lobbying bodies that enact confrontations with TNCs regarding socio-economic issues, and therefore TNCs’ influence in governing the global economy can be dampened by non-state actors. Ultimately, while TNCs’ influence can be undermined by non-state actors, TNCs can reconfigure their GPNs to bypass social demands from non-state actors, owing to their footloose nature.

In conclusion, the different economic actors are constantly negotiating and accommodating each other so that economic value is enhanced. While TNCs are influential in governing the global economy by virtue of being the lead actor in controlling and configuring the GPN globally, and their capacity to engender uneven spatial developments globally, TNCs’ influence can be dampened by the state and non-state actors. Ultimately, the institutional asymmetry in bargaining relationship between TNCs and other economic actors can nevertheless be rebalanced by state regulation, collective action and media exposure that helps to govern firm behaviour through checks and balances, thus ensuring that no absolute power is concentrated in the hands of one economic actor.

Dawn Lin (20-O1)