Chapter 8: Linking TNCs & Nations to Globalisation

Chapter 8: Linking TNCs & Nations to Globalisation Globalisation refers to the way in which people's lives are becoming increasingly interlinked with those of distant people and places around the world. This happens economically (world trade), culturally (Westernisation of language, media & sport), demographically (international migration), politically (democracies and trading blocs) and environmentally (spread of pollutants). TNCs and national governments have a major influence on all these forms of globalisation. New technologies in communications and transport have created the sense of a shrinking world. One positive outcome has been the lifting out of poverty of millions in the emerging economies. Yet, the increasing global connectedness of nations means that events in one country can have serious repercussions for others. TNCs and nation states are two of the major players in the global economy. In 1975 there were 7,000 TNCS, while today there are over 60,000. Yet, the origin of today s globalisation began more than 100 years ago with colonialism and the industrial revolution. 19th century: The emergence of market economies in European countries, such as Britain, France and Germany, dependent on their empires to support their ambitions for power and wealth, facilitated the expansion of transport and communications networks around the world. Capital flows expanded as European companies started to operate overseas World trade grew as these prosperous European nations exploited the raw materials of their poorer, but resourcerich colonies. In return, some manufactured goods made their way back to the colonies. 1940s onwards: After 1945, a new world economic order began to take shape. The Bretton Woods Conference of 1944 saw allied nations meet to

discuss how to regulate the international monetary and financial order after the conclusion of WW2. The resulting Bretton Woods Agreement of 1948 introduced exchange rate management, with all currencies fixed to the value of the US dollar, and the dollar convertible to gold at $35 per ounce. In addition, two international organisations were established to help oversee the new order; the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), usually referred to as the World Bank. Attempts to establish the International Trade Organisation failed, due to US objections, although tariff reductions were achieved through the General Agreement on Tariffs and Trade (GATT). Essentially these agreements were heavily biased to support the economies of the world s wealthy nations. The rising price of oil in the 1970s created unprecedented wealth for the world s oil-rich states, particularly the Middle East countries of Saudi Arabia, Iran, Iraq and Kuwait. The new wealth of the oil producers was invested in European and North American banks, who loaned the money to LEDCs, including the emerging industrial economies whose cheaper labour costs provided a comparative advantage for investors. The result was that manufacturing processes began to spread across national boundaries, thereby becoming more fragmented. The collapse of the Soviet bloc after 1989 led to further opportunities for investment, as the Former Soviet Countries (FSCs) established market-orientated economies that were more integrated into the capitalist system. The emergence of the first-wave of exportled NICs, such as Singapore, South Korea and Taiwan, was a further sign of the increasing complexity of international trade. The opening up of the large economies of China and India to the outside world has continued the process of globalisation. As a result, the connections between people and places have been lengthened and deepened. Relatively few places remain disconnected from global trade today. Even poor slum dwellers or rural farmers in the least developed nations are likely to find themselves consuming items with distant origins. One further outcome is that TNCs have

now become more influential than governments, controlling greater wealth and investment. Factors and organisations promoting globalisation: World trade has been fundamental to maintaining and intensifying global interdependence. By the 1970s, a multilateral trading system had been established. Several rounds of GATT trade negotiations led to the gradual lowering of the main barriers to international trade, particularly tariffs, which on average are just 10% of their original levels. GATT became the World Trade Organisation (WTO) in 1995. By 2000, world trade was 22-times the level of 1950. The WTO is the only international organisation today dealing with the global rules of trade. Its 160 members account for more than 95% of world trade. The main function of the WTO is to ensure that trade flows as smoothly, predictably and freely as possible. This is achieved by eliminating unfair practices (e.g. subsidies and dumping), and making trade more open (e.g. removing tariffs and quotas). Such anti-protectionist measures have helped producers and purchasers of manufactured goods and services to conduct their business more efficiently and competitively. However, the WTO has been less successful in ensuring that the advanced economies adopt a similar level playing field for the exporting and importing of agricultural products. Since the 1950s, countries have joined together to form trading blocs, in order to stimulate trade between them, and to obtain economic benefits from co-operation. The EU is a prime example. Formed under the Treaty of Rome in 1957, it has grown from the original 6 member nations to 28 members. This gives it a combined population today of around 500 million, and a GDP exceeding $18 trillion. The EU trade bloc has created geopolitical consequences for neighbouring countries outside the bloc. One such example is the ongoing crisis in Ukraine, triggered by its government seeking closer ties with, and eventual membership of, the EU rather than agreeing to further integration with its once strong ally, Russia.

Trading blocs have also played a significant role in the growth of TNCs. Mergers and take-overs are usually less restricted when the companies concerned originate from inside the same bloc. Meanwhile, trade barriers imposed on imported goods have been a factor in persuading overseas TNCs to locate some of their manufacturing facilities within the world s major trading blocs. The IMF has played an important regulatory role in the operation of the global financial system. It offers financial and technical assistance to its members, making it the international lender of last resort when a country is in crisis. Greece and Ireland have had to call on the IMF for financial support in recent years. In exchange for support, the IMF imposes conditions such as cuts in welfare and education spending by governments. Furthermore, emerging economies requiring IMF support are expected to open themselves up to further investment by TNCs. The World Bank deals mainly with internal investment projects in low-income countries, with the stated aim of reducing poverty. Loans are set at the current market rate. However, one branch of the bank provides interest free loans with long repayment periods to the very poorest countries. Two major events helped to accelerate the process of globalisation: The emergence of free market ideas, based on the beliefs of the US economist Milton Friedman, which were promoted by the governments of Britain (Margaret Thatcher) and the USA (Ronald Reagan) in the 1980s. The shift towards deregulated financial markets in the 1970s and 1980s, brought into existence the global financial system. Before this, the operations of banks, insurance companies and investment companies had been largely restricted geographically to within nation states, as well as tightly regulated by their governments. Linked to the changes to financial markets was the decision by the US, in the early 1970s, to abandon the system of fixed exchange rates, and replace it with floating exchange rates.

Technologies have also facilitated globalisation: Computer technologies have enabled the rapid transfer of money and information. Fibre optic cables have connected most countries in the world to high-speed internet, allowing access to the World Wide Web, email and telephone networks. Automated production processes, including robotics, have replaced skilled manual tasks, allowing a more flexible choice of location. Transportation, such as air travel and container shipping, has become cheaper and quicker, bringing further time-space compression to today s world. Globalisation has brought about a new international division of labour. It is possible to identify two main patterns: The highly skilled, highly paid decision-making, research and managerial occupations have largely been retained by the world s advanced economies. The unskilled or semi-skilled, poorly paid assembly occupations are largely the preserve of the low-income and newly emerging economies. Nevertheless, the emergence of several generations of NICs in Asia has complicated this simple division. First generation NICs, such as Singapore, South Korea and Taiwan, have a relatively high proportion of their labour in decision -making, research and managerial occupations; a consequence of their rising labour costs and higher education levels compared to other more recently industrialised countries (RICs). Global shift of manufacturing: In the 1950s, around 95% of manufacturing was concentrated in the developed world. Since then, deindustrialisation and decentralisation have occurred as a result of FDI by TNCs in those NICs and emerging economies able to take on manufacturing tasks at a competitive price. Deindustrialisation up to the 1970s was largely confined to heavy and labour-intensive industries, especially

shipbuilding, steel and textiles. The 1980s and 1990s saw the electronics and automobile industries transfer production to NICs. This filtering down of manufacturing industry from the advanced economies to the emerging economies is known as global shift. Concentration v decentralisation of services: The provision of services has become increasingly detached from the production of goods. While manufacturing has become more dispersed worldwide, high-level services, such as investment banking, fund management, share and currency trading have increasingly concentrated in a small number of 'world cities', such as London, New York, Tokyo and Frankfurt. The global casino has produced significant wealth for a small number of the world s advanced economies. However, a recent trend has been the decentralisation of low-level services from the advanced economies to the developing world. For example, customer call centre operations and other 'back office' functions have moved from the UK to India where employment costs are below 20% of UK levels. This globalisation of services over the next few decades is likely to follow the pattern already seen in manufacturing. Global movement of labour: Labour markets are not as advanced as financial markets, as people move less easily around the world than money. Only 15% of the world s workers are estimated to be genuinely globally mobile. This is due to people showing affinity to their country of birth, as well as the restrictions imposed by immigration controls. However, in recent decades there has been an increasing movement of people seeking employment across international borders, such as from Asia to Europe and from Eastern Europe to Western Europe. Migrants heading for MEDCs are often willing to take low paid employment, a contributing factor to the survival of manufacturing and low-level service jobs in these countries.

Global financial crisis: After two decades of rapid globalisation, the Global Financial Crisis of 2007/2008 brought the largest and most severe financial turmoil to the global economy since the Great Depression of the 1930s. The scale and impacts of the global credit crunch were beyond the worst expectations of governments and business leaders, with the interdependent nature of the global economy ensuring that no nation was left unaffected. In the 12 months after September 2008, world GDP fell for the first time since WW2, and the fallout from the financial crisis continues to this day. The Global Financial Crisis was responsible for the near or total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. Housing markets also suffered, resulting in evictions, and unemployment levels rose. The crisis played a significant role in the failure of key businesses, declines in consumer wealth, and a downturn in economic activity leading to the 2008 2012 global recession. The crisis was the result of an unsustainable economic boom involving reckless speculation and lending by major banks. Weak regulation of these banks by governments exacerbated the situation, by allowing them to trade high-risk loans on to other firms in the form of bonds. Excessive lending to customers was particularly prevalent in the US, where sub-prime property mortgages had escalated in number. Banks converted these growing mortgage debts into bonds, which were then traded with other firms, spreading the risk. Some banks had been lending several times more money than the value of their own assets. A colossal bust was almost inevitable, and the trigger came as defaults on sub-prime mortgages started to rise. Property prices fell, confidence collapsed, and the value of bonds plummeted. The collapse in September 2008 of the US investment bank, Lehman Brothers, brought further turmoil to the banking sector. Banks were forced to cut their lending, to stabilise their debt

to assets ratio, and this had huge impacts on household expenditure, sending global trade into freefall. Inevitably, there were other factors that played a part in the financial crisis. One such factor was China s huge trade surplus, which had helped to create enormous profits for its government and businesses. Due to the interconnected nature of the global economy, spare money in China was converted into US dollars, helping to reduce interest rates in the US and Europe, thereby fueling the boom in borrowing. A number of nations were especially hard hit by the Global Financial Crisis, in the form of sovereign debt crises. The collapse of the major Icelandic banks had severe repercussions for Iceland s economy. Among the EU nations, Greece, Spain and Ireland suffered from rising unemployment and depressed property markets. Parts of Eastern Europe, including Hungary, Bulgaria and Ukraine, were badly affected too. Even the oil-rich Middle East could not avoid the repercussions of the financial crisis, with Dubai s property market declining in 2009 after a six-year boom. This created a near $60 billion debt repayment problem for the government s investment arm, Dubai World. For the Group of Seven (G7) economies, such as the UK, France, Germany and US, the rescue packages of their governments stabilised their markets, but have left enormous collective debts that will take many years of austerity measures to overcome. Globalisation s power shift: The winners of the financial turmoil were relatively few, but it appears that China has emerged from the global credit crunch in a stronger position than its competitors. Although the global economic slowdown impacted on demand for China s exports, $400 billion of additional investment by the government helped to boost domestic demand, allowing the economy to return GDP growth figures close to the double-digit rates of the past. In late 2010, China surpassed Japan s GDP for the first time, making it the world's second-largest economy, after the US. By 2013, its exports were booming again, giving China a trade surplus of around

$260 billion, a 12.8% increase on the previous year. Furthermore, its investment abroad was also accelerating, with China forging southsouth alliances in a bid to create a new economic relationship with the continents of Africa, South America and Asia, via a range of infrastructure projects and trade agreements. China s increasing involvement in these markets, and the cultural changes being brought by millions of its migrant workers, is helping it to project an alternative world vision that may challenge the dominance of US soft power. The emergence of the BRICS could signal a further change to the economic and political landscape of the world. Each country has the potential to achieve a far greater degree of economic influence, but there are also increasing indications that the BRICS have ambitions to organise themselves into a political club, allowing them to convert their economic power into greater geopolitical influence. In particular, an alliance between the BRICS could act as a counterweight to Western-dominated organisations, such as the WTO and the IMF. Only time will tell if the BRICS can work together long-term to shift the balance of power away from the advanced economies of the West. Outcomes of Globalisation: Supporters of globalisation refer to the evidence from numerous countries of their increased prosperity. Globalisation has provided opportunities for countries to exploit their comparative advantages, ensuring that resources are used more efficiently. Successes? Economic outcomes - world trade has grown massively, largely due to the role of TNCs in accelerating the economic interdependence of nations. Many developing nations have reached NIC status, lifting huge numbers of people out of poverty. Cultural outcomes - western culture has spread to many parts of the world through TV, cinema, literature, sport, advertising and the influence of the internet. English has emerged as the global language.

Demographic outcomes - the growth of international migration has created far more multicultural societies. Urban-rural outcomes - urbanisation and industrialisation have shifted the balance of power from the countryside to the cities. A hierarchy of global cities has emerged to act as centres for the global economy. Political outcomes - the emergence of trading blocs has reduced the influence of nation states. Western democratic principles have been adopted by more developing countries. Concerns? Exploitation - foreign TNCs utilise workers in developing countries because of the lower wage rates. Factories are little more than sweatshops, with employees subjected to long hours and a dangerous environment. The result is minimal economic benefit, but significant health and social problems. Brain Drain - increasing migration flows have resulted in many of the better-educated and more talented workers leaving the poorer countries for the greater rewards available in the richer countries. Cultural Loss - The dominant Western nations have exercised their soft power by exporting their popular culture to many other countries. The world has become more homogenised, with the danger that indigenous customs and values will be lost forever. Environmental Damage - Environmental considerations have been a low priority, since developing countries are more concerned with achieving economic gain from their mining and manufacturing activities. TNCs have been quick to exploit any lax environmental laws. The growing consumption of fossil fuels among the NICs, such as China, has negated any reductions among the advanced economies. The global shift of manufacturing simply transfers the source of pollution to a new location, doing nothing to reduce the planet s carbon footprint.

Tasks & Discussion: Outline the evidence that supports or refutes the following statements: Most of the world s TNCs are from Europe and North America World trade has grown massively over the past few decades Deindustrialisation has taken place in the world s advanced economies London is the No1 global city Russia and China are fully integrated into the capitalist system India s economy is based on the service sector The global economy is now more in the hands of the NICs than the advanced economies All countries benefit in the end from globalisation Examples of Exam-Style Questions on TNCs & Globalisation: Describe the spatial organisation of TNCs. Outline the reasons for the growth of TNCs. Discuss the outcomes of globalisation. Evaluate the economic, social and environmental impacts of TNCs on their host countries. Assess the economic and social impacts of TNCs on their country of origin. Discuss the role and importance of TNCs in the global economy. (essay) Discuss the importance of TNCs and NICs on global economic growth. (essay)