Introduction
The current business environment has become complex and competitive such that many companies are diversifying their operations to foreign markets to survive. This has led to the emergence of transnational corporations which carry a lot of power in the global economy. Transnational Corporations can be described simply as big companies which operate in more than one country in the global market. They encounter many issues when deciding where to locate their Research and Development and various production facilities. Sometimes they use their influence in the economies they operate in, and may exercise unfavorable actions which have serious implications in the countries in which they base their R&D centers or the production facilities. Their powers allow them to enjoy the cost efficiencies and economies of scale as well as other benefits in the globalization of production facilities This paper aims at identifying advantages and problems of the transnational corporations across different nations and pointing out different ways through which these corporations can be internally structured to enhance their position in the global economy.
Advantages and problems from the internal organizational structure of TNCs
Most of the transnational corporations are very large with sales revenues that exceed the general size of many economies in which they operate especially in third world countries. The effect of this size has led to many of these countries losing their identity and loyalty or especially where the TNCs become involved in the decision-making of these countries or where the countries become over reliant on these TNCs. Since many are becoming hard to regulate through the national laws. Their political strength and general influences on the global economy are making them prove to be sovereign in their way. This strength is enhanced by the huge capital base that gives them a competitive edge over any competitive force in the economy to an extent that they are viewed as the dictators of the global market conditions.
Their internal organization makes it possible to hire the best talents in the world. The result of this is not only the galvanization of their internal strength but also adding value to the society through job creation and reduction of unemployment levels. This is coupled with other benefits that are afforded to the global economies, for instance, United Nations (1993 p 8) argues that Transnational corporations are becoming central to the world economy in creating a linkage through foreign investment, technology, and trade. They also act as a force that drives growth in the economy, and the social welfare of the developing nations which is found to be critical.
The technological endowment has been one of their key focal points especially when they seek to intensify their research and development. The world economic trends currently are moving towards global automation, the critical role of which is played by the TNCs. As they pursue their organizational objectives, the TNCs have to create organizational structures that will be compatible with the geographical locations they intend to venture thus contributing to the reorganization of their targets through technological transfers and orientation. According to Jenkins (1988, p. 63), the third world’s technological revolution can lay allegiance to the role played by the TNCs’ monopolistic control of technology as they diversify their operations to the foreign markets.
Although the issues of environmental conservation have been receiving heated debates, the current trend is that the TNCs are adjusting their internal structures to ensure they play their role in uplifting social welfare by adopting the Triple Bottom Line strategy. Sometimes they use cleaner technologies and advanced technologies, and many of them have internalized a greater degree of the environmental responsibility for having developed their staff on the environmental technical experts. According to Dickens (2007, 171), the TNCs realize the potential of integrated networks which is enhanced by the combination of organizational structures and geographical configurations. In this case, the transnational corporations are tending to mount more pressure on the environmental and social nets of safety in many countries as a way of pursuing a competitive advantage in the global market.
The internal organizations of the TNCs have not been favorable especially to the society as can be evidenced by the negative effects they have had on the environment – more so causing pollution and degradation. Transnational corporations put more pressure on set environmental standards which they view as trade barriers and by so doing, they affect the process of sustaining economic growth negatively especially in developing countries. Although Ietto-Gillies (2002 p 6) argues that the Transnational corporations do play a major role in many qualitative and quantitative modes of integration and globalization, their huge demand for the materials gives impetus to starting new mining’s, oil fields, and other activities that undermine environmental sustainability, over and above their push for unrealistic levels of consumptions of energy and materials for lower quality products.
Issues TNCs face in deciding where to locate R&D and production facilities
The TNCs play a key role in global economic growth; more so facilitated by their tenacity on the globalization of R&D. the globalization of R&D has been instrumental in influencing the economic growth of developing countries especially China and India which have been the hubs of Foreign Direct Investment (FDI) from the TNCs. Moreover, United Nations Conference on Trade and Development (2006) is on the view that TNCs contribution to the developing countries builds up of their R&D commercialization systems is significant not only due to the provision of finances but also due to the facilitation of access to global supply chains and global markets, thus making them enjoy the benefits of the integrated global economy. Moreover, the TNCs have facilitated the growth of R&D through technological transfers and improved host country environments and flexible regulatory frameworks.
Despite these developments in the globalization of R&D, the TNCs have encountered major challenges, especially when making decisions on setting the R&D centers in foreign markets. One of the major issues faced in deciding on a location is whether the TNC should centralize or decentralize the activities in the foreign country. This may be influenced by the size of the country’s market into which the R&D and production facilities are to be located. For instance, the market of China which has the largest population in the world has been the focal point for many TNCs as far as localization is concerned since the high and cheap population, high literacy levels and the steadily growing economy provide a viable market of new products introduced through the R&D and production facilities established in the country and an opportunity for competitive advantage (Tian, 2007, p. 168).
Secondly, localization of sourcing is a major challenge especially concerning the availability of quality raw materials and government protection in sourcing the materials. Although the materials may be available, the quality is compromised leading to inefficiency of production or the TNCs seek to access the materials from their headquarters which may tend to be costly. To minimize this problem, Tian (2007, p. 175) suggests that the government of the host country should come in to help in regulating the quality of components while the TNCs should provide financial assistance to the local suppliers to improve quality or the TNCs should seek local partner and establish their plants to produce the raw materials.
Thirdly, a geographical endowment in a foreign country plays a key role in making R&D localization decisions. For instance, the level of infrastructural development, market structures, and other logistical issues are considered since they directly affect the performance of the research and development activities as well as the production operations. These are government-related projects and therefore it is important to first establish whether the government will be ready to offer to cooperate in the facilitation of availability of these facilities.
Fourthly, managerial issues related to the established R&D centers and the production facilities should be considered. These may include the identification of the objectives of the establishment, the exact location, staffing, and coordination. The objective identification is important as it helps the TNCs to set up the direction in which they are to follow, produce products that fit the demands of the target market, and aid in researching the local markets including the cultural behaviors in the country. Staffing especially on the managerial level is a sensitive issue that combines both networking, expertise, and continuity aspects. According to Tian (2007, p. 175) claims that development-intensive R&D centers that require significant familiarity with internal networks should be managed by the nationals of the country in which they are located. The cost of labor also plays part in staffing decisions. Moreover, coordination between the R&D centers established in the foreign country and the parent company may be a problem, especially where the interests conflict.
Why TNCs change their internal structures
Various benefits come along with the operation of a firm as a transnational corporation. Indeed, most companies are reorganizing their internal structures to fit as TNCs primarily to enjoy the economies of scale and costs efficiency derived from participating in the global market thus giving them a competitive advantage in the long run.
Expansion into the international market provides an escape route for companies especially when the local market becomes saturated and more competitive, thus enabling the firm to accelerate growth and achieve high profitability (Panic, 2003, p. 24). The enormous wealth in terms of finances, knowledge, and access to the global market held by the TNCs entices the governments of the foreign economies who in turn offer assistance in setting up plants in those countries. Lastly, most of the developed countries where most of the transnational are incorporated are very restrictive in terms of statutory regulations, labor laws, and environmental regulations thus diversification of their operations enhances the externalization of costs associated with those restrictions.
Conclusion
Transnational corporations are the current global economic movers with the developing countries being the major beneficiaries in this trend. Most TNCs organize their internal structure in a way that makes them not only be competitive in the global market but also that are in line with the geographical structures of their target foreign markets. In the globalization of their R&D centers and production facilities, the TNCs encounter various challenges which have to be sorted out before these operations take effect. The benefits that are enjoyed in operating as a TNC are making many firms organize their internal structures to gain a competitive advantage in the global market.
Reference List
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Jennkins, R., 1988. Transnational corporations and uneven development: the Internationalization of Capital and the Third World. NY, Routledge.
Ietto-Gillies, G., 2002. Transnational corporations: fragmentation amidst integration. NY, CRC Press.
Panic, M., 2003. Globalization and national economic welfare. Palgrave Macmillan. Web.
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United Nations. 1983. United Nations library on transnational corporations. NY, Routledge.
United Nations Conference on Trade and Development. 2006. Globalization of R&D and Developing Countries. Web.