How and why do transnational corporations spread production across the world, and who gains?
Explain how transnational corporations organise global production networks and assess their impacts on host and home economies
A focused answer to the H2 Geography outcome on transnational corporations. Why and how TNCs locate and organise global production networks and the new international division of labour, and their costs and benefits for host and home countries.
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What this dot point is asking
SEAB wants you to explain how and why transnational corporations (TNCs) spread production across the world and organise it into global networks, and to assess their impacts on host and home economies. The central insight is that TNCs locate each function where it is cheapest or most advantageous, creating a new international division of labour, and that the resulting benefits and costs for any country depend on the terms of investment and the quality of governance.
The answer
What a transnational corporation is
A TNC is a firm that owns or controls production or services in more than one country. The largest have revenues exceeding those of many states and coordinate operations spanning dozens of countries.
Why TNCs globalise production
- Cost reduction: access to cheaper labour and inputs.
- Market access: to reach and serve new and growing markets directly, avoiding trade barriers.
- Resources and skills: to acquire raw materials, talent and technology.
- Favourable conditions: lower taxes, lighter regulation and incentives offered by host governments.
- Risk spreading: operating across many countries reduces exposure to any one market.
How they organise: the new international division of labour
TNCs fragment production into a global value chain, placing each function where it is most advantageous:
- High-value functions (research, design, branding, management, finance) cluster in headquarters and world cities in higher-income countries.
- Routine, labour-intensive assembly is offshored or outsourced to lower-cost countries.
This new international division of labour is coordinated through outsourcing to suppliers and enabled by cheap transport and instant communication, so components and products move between countries before final sale.
Impacts on host countries
Benefits: inflows of capital and foreign exchange; large-scale job creation; technology and skills transfer; a multiplier effect as wages are spent locally and linkages develop; infrastructure investment; and integration into global markets.
Costs: low-wage, insecure jobs and poor conditions; profit repatriation; weak environmental and labour standards; outcompeting of local firms; dependence on footloose investment that may leave for cheaper locations; and lost revenue from tax incentives.
Impacts on home countries
Benefits: profits return home; high-value jobs and headquarters remain; consumers gain cheaper goods. Costs: deindustrialisation and job losses as manufacturing is offshored, and the social effects of that decline.
Examples in context
Example 1. Electronics assembly in Southeast Asia. Global electronics and semiconductor firms locate design and high-value work in core economies while running large assembly and component operations in Malaysia, Vietnam and elsewhere in the region. This brings jobs, capital and technology transfer, but also low-wage assembly and dependence on footloose investment, a textbook illustration of the new international division of labour and its mixed host-country impacts.
Example 2. Singapore as a host for high-value functions. Singapore deliberately attracts the higher end of TNC activity, regional headquarters, research and development, and advanced manufacturing such as pharmaceuticals and semiconductors, by offering skilled labour, stable governance and infrastructure. It shows a host country capturing the high-value, well-paid end of global production rather than only routine assembly, maximising the benefits of TNC investment.
Try this
Q1. Give two reasons a transnational corporation locates production in a lower-income country. [2 marks]
- Cue. Access to cheaper labour and inputs to cut costs, and favourable conditions such as lower taxes, lighter regulation or incentives (also to reach growing markets or acquire resources).
Q2. Explain the new international division of labour. [3 marks]
- Cue. TNCs fragment production so that high-value functions (research, design, management) stay in headquarters in higher-income countries while routine, labour-intensive assembly is offshored to lower-cost countries, dividing labour globally by value.
Q3. Explain one benefit and one cost of TNC investment for a host country. [2 marks]
- Cue. Benefit: job creation and the multiplier effect as wages are spent locally. Cost: profits are often repatriated and jobs may be low-wage and insecure, with the economy dependent on footloose investment.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original12 marksExplain how and why transnational corporations organise global production networks across many countries.Show worked answer →
Argument: transnational corporations spread production across the world to cut costs, reach markets and exploit each location's advantages, organising the resulting activities into integrated global production networks.
Why they globalise: to access cheaper labour and inputs (lowering costs); to reach and serve new and growing markets directly; to acquire resources, skills and technology; to exploit favourable regulation, tax and incentives; and to spread risk. Each function is placed where the location offers the greatest advantage.
How they organise (the new international division of labour): high-value functions such as research, design, branding and management cluster in headquarters and world cities in higher-income countries, while routine, labour-intensive assembly is offshored to lower-cost countries. Production is fragmented into a global value chain, coordinated through outsourcing to suppliers and enabled by cheap transport and instant communication. Goods and components move between countries before final sale.
Evaluation and marks: a strong answer links the motives (cost, market, resources, regulation) to the spatial organisation (the new international division of labour and global value chains) and shows technology as the enabler. Markers reward the location motives, the headquarters-versus-assembly division, and the value-chain concept.
Original12 marksAssess the costs and benefits of transnational corporation activity for a host country in the developing world.Show worked answer →
Argument: transnational corporations bring real benefits to host countries, capital, jobs and technology, but also significant costs, so the net effect depends on the terms of investment and host governance.
Benefits to set out: inflows of capital and foreign exchange; job creation, often large in number; technology and skills transfer; the multiplier effect as wages are spent locally and linkages develop; infrastructure investment; and integration into global markets that can drive growth (as in export-processing zones).
Costs: jobs may be low-wage, insecure and with poor conditions; profits are often repatriated rather than reinvested; environmental and labour standards may be weak; local firms can be outcompeted; the economy can become dependent on footloose investment that may leave for cheaper locations; and tax incentives reduce public revenue.
Evaluation: a strong answer judges that benefits dominate where governance secures fair terms, reinvestment and standards, while exploitation dominates where it does not, citing examples such as electronics assembly in Southeast Asia. Markers reward a balanced cost-benefit structure and a conditional judgement on host governance.
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