Transnational Corporation Further Research

To what extent should transnational corporations outsource the manufacture of products at the risk of exploiting people of developing countries?

A transnational corporation is a corporation that is registered and operates in more than one country at a time, with headquarters in one country and subsidiaries in other countries. These corporations draw criticisms as many critics are under the impression that they “exhibit no loyalty to the countries in which they are incorporated but act solely in their own best interests”. According to the World Investment Report, there are currently approximately 40,000 transnational corporations around the world. These companies have around 250,000 affiliates in foreign countries. Among the countries with the greatest number of TNC bases are Germany, Japan, Sweden, United States of America and Great Britain. Transnational corporations are becoming increasingly wealthy and powerful; they control two thirds of world trade in goods and services. The global outsourcing market was at $72 billion US dollars in 2002 and was predicted to reach $100 bn by 2005. The WIR states that "four out of five dollars received for goods and services sold abroad by United States firms are actually earned from goods and services produced by their foreign affiliates or sold to them”. The United Nations Conference on Trade and Development estimated that worldwide TNCs’ profits in 1994 amounted to $175 billion US dollars, most of which was reinvested and the rest distributed amongst shareholders.In this rapidly expanding area, exploitation is an increasingly common phenomenon, with an increasing number of transnational corporations outsourcing to less economically developed countries, and using a cheaper workforce to generate greater profits in their business.This exploitation most readily comes in the form of financial abuse, inhumane working conditions and overexertion. Another potential change that transnational corporations can cause for developing countries is one of class composition in their societies. Before the factories are brought in these countries are often dependent on agriculture and natural resources; these countries then become more industrialised, creating a growing working class, a small business sector and a capitalist class. With this inevitably trade unions and working class political organisations are formed, which often brings about industrial struggles, which can cause problems for governments. This outsourcing also leads to deindustrialisation of advanced industrialised economies, leading to unemployment in the company’s parent country and therefore often bad feeling towards the company. Companies have been encourages to do this by lifted tariffs and other protection, all of which were criticised in May of 1996, when 3,000 representatives from 188 countries met in South Africa for the UNCTAD- IX conference to discuss the implications of globalisation. An African NGO Declaration for the conference stated that “the current system of globalisation and liberalisation has had devastating effects upon African economies. Our countries have been pushed backwards into increasing debt, deindustrialisation, agricultural decline, environmental degradation, poverty and deepening inequality… We oppose a system which places growth above all other goals, including human well-being and which undermines national economic development and social security. This global system has resulted in an ever greater concentration of power and control over resources into the hands of a relatively few transnational corporations and financial institutions" Martin Khor, director of Third World Network added that "it is the poor countries that are usually left behind because the free trade regime that is supervised by the WTO (World Trade Organisation) is a system that rewards those who are already strong and punishes those that are weak…They talk of a level playing field, which means that everybody is to follow the same rules, but when the original situation between two parties is unequal and you apply the same rules to them, what you have is the intensification of the inequalities". The vice-president of the International Youth and Student Movement of the United Nations, RudoMungwashu said that "the neo-liberal economic paradigm makes our governments unresponsive to our basic economic and social needs, forces open our economies to the advantage of external traders and investors, and makes African countries ever more dependent upon the richer industrialised countries and their transnational corporations".

Beginning with that of information technology, global outsourcing has been going on for a long time. Primarily, the main objective of outsourcing was making operations within a company more efficient. However, from around the late 1990s companies began to experiment with Business Process Outsourcing, which meant they would outsource manufacture and in some cases design of their products so that they are free to concentrate on branding and advertising. When outsourcing was still a novelty, it was viewed as “little more than a ho-hum tactic aimed at reducing costs”, however it is now seen as a strategic management tool. Today, outsourcing can be split into two categories: “tactical” and “strategic” outsourcing; the former being in response to a practical problem, and the latter being more in alignment with a company’s long-term aims. “Tactical” outsourcing is often done purely in order to reduce costs. For example, transnational corporations may choose to outsource information technology infrastructure to save operational costs. The goals of “strategic” outsourcing are often more dramatic, but take longer to achieve; these often involve shifting the focal point of the organisation to activities that have a larger impact on its success. One of the earliest recognisable forms of outsourcing that transnational corporations put into action was Coca-Cola’s outsource of bottle manufacture. Companies such as Coca-Cola have moved manufacture of their products to newly industrialised countries (NIC) for many reasons. The main reasons are based around the company’s workforce. In a hugely expanding company, like Coca-Cola by the beginning of the 20^th Century, thousands of employees are required to produce the necessary products. With headquarters in a more economically developed country such as the United States of America (TNCs based in the USA are responsible for the largest share of foreign direct investments, which amounts to $610 billion US dollars, making the USA the biggest imperial investor), there are factors that would hugely limit the profit made by companies such as Coca-Cola were they to manufacture their products in the same country.These factors include government legislation, as minimum wage is much lower in NICs than in the USA, therefore in the USA more money would be paid to the workforce, the cost of manufacture would increase, and overall profits would be drastically reduced. Yield is also increased to greater extent on day to day basesin NICs, as working hours tend to be more relaxed than in the USA. Money is also saved by companies when outsourcing in regard to working conditions, for example generally less money would be spent on trying to abide by health and safety regulations in NICs. Furthermore, as well as having a cheaper workforce in NICs, TNCs often find their workforce to be more consistent, as in many cases there is stricter prohibition of strikes. Lastly, there are great incentives to many TNCs towards NICs due to their offers of tax reduction. For example, many NICs offer tax free zones to areas in which TNCs manufacture in their country, so with less tax the company gains yet more profit. With so many advantages to moving manufacture to NICs, it is no wonder that companies such as Coca-Cola choose to do this, leaving them free to focus on core strategic business objectives, such as branding and growing market share.

Transnational corporations often have very negative impacts on countries in which they locate their factories. While companies appear to be investing in a country and making it wealthier by placing factories in it, the economic benefit to the host country is often minimal due to the fact that most profits will return to the parent country. Although locals are paid for their work in these factories, the wages will generally be as low as the company can feasibly make them, as their main aim is to maximise profit. Likewise the new technology that transnational corporations bring into developing countries may seem to be a huge advantage to them, but in reality the companies often withhold information about their technology with fear of competition; even when it is open with the resources it has, it is likely that people of the host country may not have the privilege of an education into such things and therefore their industry cannot benefit entirely from the technology. This lack of a good education that is common in many places where TNCs set up factories also limits the jobs that companies can offer to the local people, so people with the right set of skills are often brought into the country, leading to a reduction in the employment opportunities that are initially apparent when a factory is built. In fact, the locals can be left unemployed and still affected by the companies, for example small towns near factories are often heavily polluted, as not many precautions are taken as this would cost money and reduce profit. Small towns such as these can be benefitted, however, by new and further reaching transport links built by companies, however these are limited as the companies only tend to fund this development if it directly aids their routes and therefore will not necessarily prove useful to local people. Another limited yet undeniable advantage of transnational corporations outsourcing to NICs is that they often act as growth poles for similar countries. This can drastically increase the industrial sector of a country and lead to huge economic growth. A good example of a transnational corporation that has outsourced to developing countries at the risk of exploiting their people is Nike.

The brand that is known today as Nike Inc. was founded in 1964 as “Blue Ribbon Sports” by Bill Bowerman and Phil Knight. The company originated in Beaverton, Oregon and this is the location of its headquarters today. The company’s popularity was, and undoubtedly still is, driven by its marketing strategies. By the 1970s, athletes had already been signed to Nike, and following their success in the 1980 Olympic Games, not only was the company becoming well known among the public, but a snowball effect was created among athletes who were willing to advertise for Nike. Arguably the most notable marketing investment Nike made was in Michael Jordan, whose notoriety in basketball boosted their “Nike Air” products. Since then, such people as Tiger Woods, Lance Armstrong and the Brazilian national soccer team have signed with the brand. Nike became an international company in 1975 on opening an office in Taiwan. Today, Nike acquires its products from over 800 contract factories in over 50 different countries across the globe.

Since becoming a transnational corporation, Nike has been under scrutiny and has received huge amounts of criticism for not incorporating sufficient corporate social responsibility into its overall business strategy. This is due to the fact that Nike have not been as successful as many other American transnational corporations at minimising negative impacts associated with outsourcing manufacture of its products to external companies. Nike claims that it is difficult to control what is happening in individual factories, therefore exploitation of workers takes place at ease in a nation where unemployment is high and employees can easily be replaced. In fact, while high quotas are set for workers in factories, excessive overtime is required in the majority of cases, with an average Nike worker spending over 300 hours per year longer in the factories than Vietnam’s labour law allows. Investigations into the response of workers show that if the workers refuse to work overtime or complain, they are punished or given a warning, and on their third warning they are fired. This exploitation results in the majority of workers in factories being women under the age of 25. Reports have been made of physical abuse, sexual abuse, salary below minimum wage and a debilitating quota system in developing countries such as Vietnam involved in Nike’s production process.

While Nike may claim that they are concentrated on quality and productivity, the facts show that they predominately set up factories in developing countries for the cheap labour costs. For example, until the late 1980s Nike manufactured many of its trainers in South Korea. However at this time labour costs in South Korea rose, so Nike decided to move production to Indonesia where costs were lower. In the space of four years, the import figures of trainers from South Korea dropped from 58,896 to 10,970. A similar movement of production took place in the 1970s from Taiwan to China and Vietnam. Undoubtedly an additional attraction of Indonesia, China and Vietnam would have been the illegality of independent trade unions.

The fact that Nike outsources the manufacture of its products means that it is free to specialise in what it does best: brand development. Nike spends US$1 billion on marketing the brand each year, this is equal to ten per cent of the brand’s total revenue. This puts the company at an advantage to many competitors, but it the amount of money put into advertising means that it is lacked elsewhere. If Nike doubled the salaries of its 30,000 employees in Indonesia the annual payroll would be roughly equivalent to what Michael Jordan is paid in one year to advertise the product. This fact has brought in countless protests and some of Nike’s expensive slogans have paid a price. For example “Just do it.”, which was ridiculed by Oxfam Australia when making banners featuring the slogan “Just stop it. Whose sweat is in your shoes?” Oxfam Australia has been campaigning for Nike’s workers’ rights for thirteen years. They make an argument in accordance to the fact previously mentioned, but in regard to Tiger Woods’ pay. They argue that if Nike can afford to sponsor Tiger Woods for $100m, then they can afford to pay their shoe makers enough money to sustain themselves and their families. 

Part of the argument against Nike’s activities is the way in which other multinational corporations (MNC) have dealt with their workers in developing countries, putting into perspective the supposedly inacceptable treatment many of Nike’s indirect employees are subjected to. These are indirect employees due to the subcontractors that the company uses, who make it possible for responsibility of the manufacture of Nike’s shoes to be taken away from Nike – which leads to Nike’s claims that they are in the business of "marketing" shoes, not making them. However, Nike dictates the terms to the contractor: the design, the materials, the price it will pay, so Nike, the parent company, remains in control even though it doesn’t legally own any of its factories. This is an area in which many other TNCs such as Coca Cola come out stronger than Nike as they do not use subcontractors, and therefore has been proven not to exploit its workers as harshly as Nike. In Vietnam, Coca Cola workers are paid $80 a month andreceive fringe benefits such as English lessons and sales training. When compared to Nike’s 20 cents an hour or $1.60 per day, there is obvious justification to the criticism that Nike receives. To put these wages into perspective, workers in a Nike factory in Vietnam have claimed that the cost of three meals per day in the location of the factory is approximately $2. This results in workers not having enough money to feed themselves, let alone earning the means to support their families, and the intensity of their work throws into light to the injustice of their wages (manufacturing a pair of Nike shoes involves cutting, stitching, shaping and packing of up to 200 components). Ninety per cent of workers interviewed by Vietnam Labor Watch said they received extra help in terms of money, food or housing from their families to make ends meet. Furthermore, during the first three months of work in these factories, workers were paid $37 per month, with Vietnam’s minimum wage at $45 per month. Nike’s reasoning behind this figure is that Vietnamese law states that training wages may be below minimum wage. However, this “trial period” that is allowed for by Vietnamese law is limited at six days, not three months. In violating the provisions regarding minimum wage, provisions regarding labour contracts and provisions relating to the "trial period" Nike is supposedly in triple violation of Vietnam Law.

Nike has received a great deal of criticism from CBS News. In October of 1996, CBS News reported statements from two female workers at a Nike Plant in Vietnam, with lines such as “you have to meet the quota before you can go home”; “She hit all 15 team leaders in turn from the first one to the fifteenth”; “The physical pain didn't last long, but the pain I feel in my heart will never disappear.” The two women were later fired for talking to the press. Other workers reported that they are not allowed to go to the bathroom more than once per 8-hour shift and are not allowed water more than twice per shift; that it is a common occurrence for workers to faint from exhaustion, heat, fumes and poor nutrition during shifts; that there is frequent verbal, physical and sexual abuse and that corporal punishment is often used; and that health care is inadequate (for example at one factory of 6000 employees one doctor works for 2 hours a day while the factory is open for 20). CBS News claims that Nike is refusing to acknowledge that these unjust occurrences are taking place. While investigations showed that on one occasion 15 women were hit on the head by their supervisor, Nike’s president and CEO, Philip Knight said that the problems in Vietnam consisted solely of an incident in which one worker was hit on the arm by the supervisor. CBS News’ Roberta Baskin said, “it turns out Nike has a great deal to learn about what goes on inside these factories”. At Nike Vietnam’s headquarters, a CBS News reporter approached a Nike representative, who covered the camera and said “I have things to do”.

In 1998, Philip Knight promised to change Nike’s labour practices in Asia.Although Nike have made changes, its critics claim that the changes they have made only include such actions such as “staffing up its PR department to go on a charm-offensive to seduce the public, to create confusion among concerned people about the reality of Nike sweatshops and to sow doubts about anti-sweatshop activists” and “using the Fair Labor Association (FLA) as a quasi-stamp of approval for its labour policy even though in reality the FLA is still a non-functioning organization. The FLA has not even monitored a single factory yet, despite numerous press releases promising actions”. These critics argue that Nike is putting on a show of acting responsibly, whilst behind closed doors, they are “sabotaging any labour organisation that stands in its way”. Indeed Phil Knight has retracted his donation to the University of Oregon because the school joined the WRC, a labour group whose agenda competes with the FLA. Nike has also supposedly threatened to stop funding any other universities that join the WRC.

            Nike’s response to confrontation in regard to its supposedly unethically managed approach to being a transnational corporation is this: “Because we were among the first companies and industries to experience such scrutiny, we did not have the benefit of an established roadmap. Instead, we had to learn a great deal through taking action based on our best instincts, evaluating the results of those actions, and then modifying our course based on what we learned through those experiences.” Indeed, they claim to have modified their course to a certain extent, and figures they provide show that over the past three years, the number of audits showing serious, repeated violations has been at 4% or fewer, and that “the proportion of the most severe issues has decreased the number of factories with unknown conditions from 48% to 8%, as transparency has expanded”. After admitting that they had not been as vigilant as they could have been in the past in regard to monitoring working conditions, Nike launched their ‘Transparency 101’ program, which supposedly makes the public aware of the company’s every action. Nike also claims that they are making efforts to phase out PVC and other potentially harmful chemicals from their products. These changes are all in alignment with the CERES principles that Nike endorsed in November 2000 Dusty Kidd, Nike's vice president for corporate responsibility stated that “We hope that through this engagement with CERES, we can advance our work in environmental and social issues”. A review from the Far Eastern Economic Review noted that in the previous year, Nike had improved in almost every category of corporate and issue-specific leadership.

Transnational corporations have, to a large extent, monopolised certain branches of production across the globe. For example, the foreign affiliates of the 23 electronics TNCs made 80% of the total electronics sales in the world in 1995. Between the top 100 TNCs across the globe (according to value of foreign assets) were around $3.7 trillion US dollars’ worth of assets and one sixth of foreign direct investment across the globe.Most foreign direct investment (FDI) originates in more economically developed countries, such as the USA and UK, with 75% of foreign investment stocks in developed countries such as these. Naturally, developing countries such as China receive an increasingly large amount of FDI from these countries. China alone received $34 billion US dollars in 1994, with its 45000 foreign affiliates. However, as China received more investment, this gave the country the opportunity to make foreign investments itself, and by the end of the decade China itself had almost 1,000 transnational corporations and was investing around $2.4 billion US dollars into foreign countries every year. China is not alone in increasing its investments: the percentage of the flow of investments from developing countries rose from 5% to 15% from 1984 to 1994.The United Nations Conference on Trade and Development states that there are now many TNCs based in developing countries, including 10 in Brazil, 9 in South Korea and 7 in Taiwan.The huge amount of control transnational corporations are able to take over a country are demonstrated by the activities of BHP, an Australian TNC with nearly 50,000 employees in over 50 countries across the globe. Of its $18 billion sales revenue, a third came from foreign affiliates, such as those in Papua New Guinea. It was recently discovered that BHP had drafted legislation in Papua New Guinea that prevented the country’s landowners from suing the company for pollution and damage to the country’s gold mining operations, making the action of trying to obtain compensation a criminal act. A further agreement with the government of Papua New Guinea said that BHP would be able to veto over the legislation before it was passed. Another example of a hugely influential company is Shell.This is proven by the magnitude of its assets in comparison to national economies: Shell’s $100.8 billion US dollars of assets are over double New Zealand’s GDP, and triple Nigeria’s GDP.