Human Geography – The Globalisation of Economic Activity

1. Uneven Development in the Global Economy

 Globalisation
- Characteristics
- Processes
- Impact on the world economy
 Uneven global distribution of activities
- Illustrate how globalisation has affected the economies of LDCs, DCs and NIEs
 NIDL
- Causes of the emergence of a new NIDL
- Impact of the emergence of NIDL on the global economic activities
- Impact of new technologies on work
 Job specialisation, multi-skilled production, changes in production and labour
 Impact of global economic change
- Rise in new service sectors: tertiary, quaternary and quinary
- Locational trends in producer and consumer services
- Internationalisation of service firms
- Rise of SMEs
- Privatisation / Deregulation of public services

2. Transnational Corporations

 Characteristics of TNCs
 Spatial organisation of TNC’s activities
 Linkages with host economy
- FDI and influence on national and regional economies
 Case study of TNC

3. Role of the State and Supranational Bodies

 Role of state in economic development and its impact on national economies

 Supranational bodies and their impact on national and regional economies
- Trading blocs / regional blocs
- International institutions

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1. Uneven Development in the Global Economy

Globalisation

 Discuss the characteristics and processes of globalisation.

 Discuss the impact of globalisation on the world economy.

What is globalisation?

 Increasing interconnectedness & interdependency of people, cultures, economics and

politics at all spatial scales.
 More functionally integrated and independent. The compression of the world.

Processes involved in globalisation

 Economic: Flow of capital and goods: production and investments by TNCs, etc., the
changing structure of firms
 Social: Movement of people: migration, tourism, demographic changes, multicultural states.
 Cultural: Diffusion of information and cultures: InfoTech like internet, cultural forms
(movies, brands), cultural homogenisation
 Political: Rise of international organisations: UN, IMF, ASEAN, EU etc. Supranational
organisations, trade blocs, FTAs

Globalisation is driven by:

 Improvements in transport – air freights, shipping.

 Improvements in communication – Internet, phones, email
 The search for new, unsaturated markets by economic agents like firms
 Need to find the most efficient methods of production – comparative advantages

The impacts of globalisation on the world economy

 Shrinkage of distance – a ‘Shrinking World’

 Spatial division of the global economy
 Spatial interdependence – the global supply chain
 Increased mobility and flexibility – increased flow of funds, capital
 Accentuation of regional disparities
 Convergence and divergence of economic activities

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Reasons for economic globalisation

PUSH FACTORS from home country

Expensive labour on  For textile companies, the hourly operation cost in Switzerland is
standardised goods US$35, compared to US$12 in Sri Lanka or $11 in Bangladesh.
Strong unions  In the US, in addition to health care, unions fought for and gained
retirement plans, compensated sick days, and defined benefits
High expenses on labour welfare plans. The median weekly income of a union worker is $917
compared to $717 for non-union workers.
Saturated markets  The technology market in the US or Japan are far more saturated in
comparison.

PULL FACTORS from host country

Cheaper labour  In China, wages are a fraction of those in the US, and six times
cheaper than Mexico - averaging about 40 US cents an hour for a
factory worker.
‘Standardisation’ of products  Mass production technology – Fordist car assembly lines
Cheap raw materials  Oil production in Nigeria by Shell – cheap oil.
Cheap land, low taxes, laxer  Union Carbide moving to Bhopal, India to take advantage of laxer
laws environmental laws to produce otherwise banned chemicals.

Increased mobility, transport  The increased ubiquity of shipping or air routes, email and Internet
and communications technology.
Search for new markets  China has a large consumer base, having a population of 1.3 billion.

The Reason for Standardisation of Products

Theodore Levitt (1983) put his focus on marketing of standardised products and brands worldwide as:

1. Customer needs and interests are becoming increasingly homogenous worldwide.

2. People around the world are willing to sacrifice preferences in product features, functions,
design, and the like for lower prices at high quality.
3. Substantial economies of scale in production and marketing can be achieved through supplying
global markets.

TYS Questions:

2009 H1 Q7 Either: Describe the processes that contribute to globalisation. [9m]

2009 H2 Q5 Either: With the help of examples, explain the concept of “a shrinking world”. [9m]

2010 H2 Q5 Either: With the help of examples, explain how technological change has contributed to
globalisation. [9m]

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Uneven Global Distribution of Economic Activities

 Discuss what is meant by ‘the globalisation of economic activity’.

 Discuss the global, regional and national variations in economic wealth.
 Discuss the development gap.
 Evaluate the usefulness of various indicators used to measure the level of development.

The globalisation of economic activity

It is the process of merging between domestic economies, businesses and societies. The phrase
relates to economic activity that indicates that globalization involves the participation of companies
and corporations actively contributing to the integration of international businesses. The features
of the globalization of economic activity include an international development of trade, production,
investments and flow of workforce.

International Trade

International trade relates to the exchange of capital and goods in the global market. It is an
essential component of the globalization of economic activity as business acts on an international
level mainly to ensure benefiting from participation in the global trade system. Imports and exports
are the aspects of international trade – countries and corporations producing more than they can
consume focus on exporting goods to countries which demand production. For example, a report by
the European Central Bank indicates that through the satisfaction of foreign demand, countries like
China and India have massively expanded their economies. These destinations are now a major
focus for businesses looking to buy goods and import them in countries that require production,
such as the U.S. and the E.U.

International Production

International production in the global economy – or exported production – is when businesses start
producing their goods in countries with cheaper labour and more relaxed tax systems. This allows
big companies to produce more and pay less for the labour and the country housing their production
facilities and activities. For example, the German car industry giants, as indicated by Turkish
economist Lale Duruiz, have already exported their production in Turkey, benefiting from the
economic treaty of the country with the E.U. for free movement of goods. Thus, the German
producers pay no import fees when delivering their production in Europe and save up from labour
costs and taxation.

International Investments

Investing on an international level allows companies and financial organizations to participate in

projects in different areas in the world depending on profitability and market situation. For
example, where financial organizations from the developed world seek to expand their influence on

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an international level, they would offer to invest in the developing economies to either have a share
in the production or to receive a fixed interest upon the investment they have made. This has
happened in the relationships between United Arab Emirates and the United States as described by
the U.A.E - U.S. Business Council. When first started investing in the developing Arab Union in the
late 1990s, the U.S. input $540 million in investments. Seven years later, the U.S. investments had
already grown by 724 percent, thus turning the Emirates into one of the most successful
destinations American financial institutions have ever participated in. This increase in the investment
value has contributed to the development of stronger ties between the countries and stable trade
relations between businesses from both sides.

Workforce

The globalization of economic activity includes the integration of people willing to work in foreign
economies. The most advanced example of such integration is the European Union – every citizen of
the Union is allowed to participate and exercise a profession in all the member states of the
organization through a freedom of movement legislation.

What is the development gap?

Traditionally known as the North-South divide which is shown by the Brandt Line, it splits the
countries of the world into two sides, with DCs in the “North” and LDCs in the “South”. N and S are
merely categories and are not defined geographically. More recently, it has been termed the
development continuum gap. (Blue is N, Red is S)

Development in this case is mostly defined as economic development. It refers to advancements in

technology, a transition from an economy based largely on agriculture to one based on industry and
an improvement in living standards. Other factors that are included in the conceptualization of what
a developed country is include life expectancy and the levels of education, poverty and employment
in that country. It is essentially measured by the HDI, which includes GDP/capita, education (adult
literacy rate and primary, secondary and tertiary education) and life expectancy at birth.

Globalization as the leading cause for global inequality: globalization enhances social and economic
gaps between countries, since it requires economies and societies to adapt in a very rapid manner,
and because this almost never happens in an equal fashion, some nations grow faster than others.
Rich countries exploit poorer countries to a point where developing countries become dependent on
developed countries for survival. The very structure and process of globalization perpetuates and
reproduces unequal relationships and opportunities between the North and the South, it tends to
"favour the privileged and further marginalize the already disadvantaged".

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 Impacts on Economically Less Developed Countries (LDCs)
Positive Economic Negative Economic
 Industrialisation  Local producers unable to compete
- 4 Asian tigers: From 1980-2000, South Korea - Produce farmers in Africa unable to penetrate
industrialised by 20-25%. tariffs protecting the EU agricultural market.
 Employment – direct job creation Many African and Asian dairy, tomato and
- Shell in Nigeria has employed 5000 locals poultry farmers cannot keep up with cheap
directly to work in oil extracting plants and competition from Europe, thus their incomes
another 20000 indirectly, increasing can no longer provide for their families. They
employment in the local delta area and per end up relying heavily on imports, which are
capita income. often the EU's subsidized exports.
- Nike pays around 5 times the minimum wage  Exploitation of workers
and 3 times the minimum wage in Indonesia. - Child labour: forced, unsafe employment of
Those working in export factories in Dhaka children in the textile industry in Bangladesh.
earn 86% more than those who do not. - Sweatshop phenomenon: Nike’s employees
 Improvement of technology and skills forced to work for extremely long hours with
- Intel, IBM, Microsoft and Texas Instruments comparably little pay – working 40 hours
invested in research centers in India to train overtime a week with $2.46 a day.
and employ thousands of Indian engineers at  Brain drain
low costs. - Brain drain has cost the African continent over
- Farmers in India taking Monsanto’s gene $4.1 billion in the employment of 150,000
technology via cross-breeding to improve their expatriate professionals annually.
other crops. - Indian students going abroad for their higher
 Financial income for country studies costs India a foreign exchange outflow
- Taxes: In Nigeria, Oil is a very important part of of $10 billion annually.
the country’s economy, accounting for 20% of - There is only one doctor for every 10000 people
GDP and 95% of its export earnings. The in Kenya. It takes $150,000 to train a doctor,
foreign MNC Shell produces half the country’s who leaves after an internship, and Africa has
oil output. lost everything that goes with it.
- Industrial Linkages: Coca Cola has an  Encourages dependency
estimated multiplier effect in China of 414 000 - Remittances to the Philippines from domestic
people, like local glass suppliers. workers abroad makes up more than 10% of its
- Investor Confidence: General Electric setting GDP ($17.3 billion), which has resulted in
up in Singapore’s Jurong Industrial Park was a dependency and laziness.
big plus that improved credibility, such that  Remittances
even as labour costs were rising in the 1990s, - Not all income generated by TNCs goes to host
firms such as Seagate still located in Singapore. country – most of it is remitted to its home
 Increased income for workers country.
- China’s disposable income grew from 46
dollars in 1978 to 10493 in 2005.
- Mexican rural poverty falls from 24.2 to 17.6,
overall poverty falls from 42% to 27.9% in the
maquiladora regions.
Positive Social Negative Social
 Increase in literacy rates  Health and safety issues
- To help with export led growth, the - Bhopal, India, 1984, a gas leak from a pesticide
government of South Korea increased literacy plant, Union Carbide in the heart of the city
rates via education from 22% in 1945 to 87.6% killed many thousands of people and injured
in 1970. half a million people.
 Improve sanitation and healthcare - In the Ramatex textiles factory in Namibia,
- Better infrastructure and technology transfer workers are not provided with protective
has caused IMR in the UN’s list of least clothing. Some workers have developed chest
developed countries to fall by half in 1960 problems whereas others have had allergic
from 180 to 2005 at 90. reactions, creating added personal medical
costs to the individual and government as they
are not covered by the TNC.

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 Decreased child labour  Inequality
- Improvements in income are generally spent - Poor people’s incomes grew at an average rate
on education – globalisation can accelerate of 3% in China from 1960 to 1990, but rich
this e.g. Dhaka, India. people’s incomes grew at a rate of 5% (50:50
 Urbanisation percentile)
- Due to manufacturing jobs in cities made - A UN report states that in sub-Saharan Africa
available by globalization, urbanization in alone, the number of poor people increased by
China has grown from 18% to 39%. almost 90 million in little more than a decade
from 1990 to 2001.
Positive Environmental Negative Environmental
 Responsible companies promoting better  Environmental degradation
environmental practices - In Nigeria, lax policies have increased air
- TNCs in Mexico, Morocco and Venezuela and pollution, with gas flaring a common practice
Ivory Coast are significantly less pollutive than (the burning of gas which cannot be collected).
local plants as they have the technology to so - Deforestation in Nigeria to clear land for the
do. production of oil and gas has greatly reduced
- Perhaps foreign firms have a greater incentive local forests used to supply foodstuffs and fuels.
to be less pollutive due to more restrictive - Monsanto dumping of PCBs and other
government oversight and licensing. poisonous materials at Brofiscin quarry in
Newport, Cardiff, England. Traces of PCBs
reported in wildlife, water and fish.
- Expansion of coastal shrimp farming in Ecuador
and Colombia resulted in polluting effluents and
intrusion of salt water into fresh water.

Impacts on Economically Developed Countries (DCs)

Positive Economic Negative Economic
 Better reallocation of resources  Deindustrialisation and stagnation
- Labour intensive industries such as textiles and - Detroit and the car industry – the Rustbelt.
assembly have shifted to China, Bangladesh, - UK Consett’s contraction in iron and steel
Vietnam and other places with cheap labour – industries
comparative advantage - High costs due to labour and strong unions,
 Tertiarisation outmoded methods of production, saturated
- 1990s: Layoffs in the US from manufacturing market for products.
sector was made up by the net creation of 22  Loss of jobs
million jobs in the service sector. - Locals lose jobs as manufacturing and even
- The number of multinational R&D centres in service-based jobs are outsourced.
China up from 200 in 2002 to 750 in 2008. - Indian IT services giant Wipro grew through
 Decentralisation and globalisation of services outsourcing by Western firms to them.
- Suburbanisation due to improved - Maxtor slashes 5500 jobs in Singapore
communications  Contagion easier to spread
- Pittsburg Suburban Business Park; Singapore - Greek and Irish debt crises in the euro region
Science Park; Doxford Business Park during the 2008 financial crisis
- Communication improvements – Call centres, - Lehman Brothers incident
software development like Wipro.
- Growing quality of labour in LDCs like China
and India that enable them to take up such
service jobs
- Increasing standardization of services due to
education, English and globally common needs
 Increased trade and capital flows
 Risk reduction via diversification
 Economies of scale by exporting goods to other
countries.

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Positive Social Negative Social
 Increased pluralism of culture  Cultural homogenisation
 Increased standard of living, leisure - “Americanisation” and “McDonaldisation”.
- Cultural imperialism – consumerism and media.
- Wiping out local cultures.
Positive Environmental Negative Environmental
 Emphasis on environmental conservation at a  Abuse and overuse of natural resources
global level - Depletion of natural resources – iron ore in
- India and China are working on reducing their South Wales, and Great Lakes, Pittsburgh (US)
carbon emissions and ecological footprint.
- In India, recycling systems in Hyderabad
convert organic waste into fuel.
- China is working on alternative sources of
energy (hydroelectric), as well as using more
fuel efficient machines. Also, reducing the
number of cars on the road in Beijing.

Newly Industrialising Economies (NIEs)

NIEs are countries whose economies have not yet reached First World status but have, in a
macroeconomic sense, outpaced their developing counterparts. Another characterization of NIEs is
that of nations undergoing rapid economic growth (usually export-oriented). Incipient or ongoing
industrialization is an important indicator of a NIE. In many NIEs, social upheaval can occur as
primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing
concerns and factories can draw many thousands of labourers.

NIEs usually share some other common features, including:

 Increased social freedoms and civil rights.

 Strong political leaders.
 A switch from agricultural to industrial economies, especially in the manufacturing sector.
 An increasingly open-market economy, allowing free trade with other nations in the world.
 Large national corporations operating in several continents.
 Strong capital investment from foreign countries.
 Political leadership in their area of influence.
 Lowered poverty rates.

NIEs often receive support from international organizations such as the WTO and other internal
support bodies. However, as environmental, labour and social standards tend to be significantly
weaker in NIEs, many fair trade supporters have advocated standards for importing their products
and criticized the outsourcing of jobs to NIEs.

NIEs usually benefit from comparatively low labour costs, which translate into lower input prices for
suppliers. As a result, it is often easier for producers in NIEs to outperform and outproduce factories
in developed countries, where the cost of living is higher, and labour unions and other organizations
have more political sway. This comparative advantage is often criticized by advocates of the fair
trade movement.

Current NIEs include: South Africa, Mexico, Brazil, China, Malaysia, India, Thailand, Philippines, and
Turkey.

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A look at NIEs – Taiwan and South Korea and the impacts of globalisation

Taiwan and Korea built their economies into developmental machines through mobilizing available
domestic resources to pursue economic growth, led by the states through allocating resources to growth
sectors and creating comparative advantages. They also played the role of safeguard to absorb both
internal and external shocks and control risks from global and domestic environments.

However, problems will emerge once the state is no longer strong enough to prevent the economy from
external risks. Globalization erodes state strength and undermines state control. Foreign factors can
easily impact domestic economics through freer flows of capital and goods. Regulation of economic
transactions across the globe needs to depend on super-national organizations, such as IMF and WTO.

Globalization also brings two possible dangers. On the finance side, barriers to capital flows are
tremendously lowered as a result of deregulation of financial markets and improvement in technology
transactions. Highly mobile capital is able to travel all over the world to look for best return,
strengthening the interconnection between national financial markets and increases volatility of national
currency. This kind of capital flows is especially fatal to the countries with seriously flawed or
malfunctioning financial system.

On the production side, globalization brings different costs and benefits to the actors positioned in
different places of the global division of labor. MNCs, usually head-quartered in industrialized countries,
dominate technology, capital resources, and distribution channels of the global markets, setting their
production facilities in multiple countries to efficiently exploit and coordinate different endowments and
then minimize production and transaction costs. MNCs are the most possible candidates who can fully
exploit the advantages brought by freer flows of capital, goods, and personnel due to their capability in
engaging global management.

Globalisation and State Intervention: Government – Business Relations

Globalisation introduced external factors, including international organizations and MNCs, into the
equation between government and business, complicating their interactions. The tendency shows that
foreign private actors may serve as better allies of local private actors than of local governments since
they have a similar goal on lifting constrains from governments. Also, the increasing importance of IGOs
(intergovernmental organizations) unquestionably undermines governments' authority, but its
relationship with governments need not be antagonistic. Often, the rules set out by IGOs need a strong
government to implement in the domestic arena, where IGOs are still unable to directly intervene.

An example was the IMF's intervention in Korean restructuring during the Asian financial crisis. During
the 1990s, Korean business gained independence from government-controlled resources and their
bargaining power increased, but the financial crisis weakened the strength of Korean private sector and
gave advantages to the government. Since the financial resource, including the IMF bailout, held by the
government was the only available resource for the private sector during the crisis, the government
obtained sufficient power to direct the action of private firms. Under the pressure of the IMF, the
government stopped rescuing sick chaebols and allowed their bankruptcy. Without guaranteed rescue,
businesses have to exchange their compliance for the rescue when they face financial
difficulty. Reducing the size of chaebols also undermined chaebols’ influence in political and economic
decision-making. The crisis and the IMF intervention moved the relationship between government and
business in Korea toward the direction in favour of the government.

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In addition, foreign investors are also entering the Korean economy. The crisis made the Korean
government relive its restraints on the entry of foreign investment. Foreign investors can purchase
Korean companies through M&A, or invest in Korean stock market more easily. Foreign ownership in
Korean listed companies jumped from 13% in 1996 to over 30% at end-2000. By 2000, foreign investors
owned 55% of the shares of Samsung Electronics and 44% of Hyundai Electronics. The rapid growth of
foreign investment in Korean companies increases foreign intervention in the economic development.

Efficacy of State Control

In addition to maintaining macroeconomic stability, states were involved in the guidance of economic
development towards rapid growth. Thus, they were characterized by a more intensive government
intervention. They allocated capital resources to selected growth sectors by means of credit control,
subsidies, and tax-reduction, and maintained or created the advantages obtained from external
exchanges through manipulation of exchange rates and maintenance of a low wage level.

Globalisation weakens the state’s control over capital allocation. Due to high mobility and availability of
capital in the global arena, capital resources can be easily secured from the global market, making the
ones controlled by the states relatively insignificant to private enterprises. To countries that heavily
depend on capital allocation to conduct intervention such as Korea, globalization of finance disarms the
states' instrument to control the private sector. Conglomerates in Korea can easily obtain alternative
financial resources from global markets without depending on the supply from the government, shown
by the increase of long-term external debt not guaranteed by the government. The ratio of the private
non-guaranteed long-term debt to the total long-term debt increased from 9.6% in 1970 to 48.7% in
1997. A reason of chaebols’ resorting to foreign financial resources is governmental limitation of their
access to domestic credits. In order to curb chaebols’ expansion and pursue efficiency, President Kim
Young Sam set quotas for their domestic loans. This policy did not really stop the increase of chaebols’
debt; instead, it forced chaebols to turn to international markets to search for their financial input.

This study gives the second tier NIEs a signal that, under globalization, they are probably unable to adopt
the same state-intervention strategies. Hence these developmental patterns and strategies may be no
longer suitable in the newly globalized world, and a new strategy that can properly cope with
globalization is needed for other industrializing economies.

Globalisation and Economic Development: The Financial System

Globalization brings challenges, especially to the countries with a malfunctioning financial system or in
the unfavorable places of the global division of labor.

Korea is notorious for the heavy debt burden of its companies. Between 1991 and 1996, the average
debt/equity ratio of Korean firms in manufacturing sector was more than triple that of Taiwan and almost
twice that of the U.S. The financial situation of the dominant chaebols in Korea suffered even heavier
debt burden than did average firms. The average debt/equity ratio of the top 30 chaebols was 403.8%,
compared with 304.7% for the whole manufacturing sector. By the end of 1997, the top 30 chaebols
bore W 357 trillion debt, equivalent to 85 percent of GDP, and about two-thirds of the debt was carried
by top 5 chaebols, indicating that Korean debt is also highly concentrated.

In the 1990s, the threshold of turning debt problems into crises was tremendously lowered due to the
interconnection of financial markets. In the Asian financial crisis, the contagion of exchange rate plunge
in the region weakened Korean capacity to repay the debt in dollars. Even though the debt ratio in 1997
was not as high as the ones in the early 1980s, under the catalysis of exchange rate plunge, a mild debt

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problem may be quickly transformed into a crisis. Korea did not maintain an amount of international
reserves large enough to cover debt service and short-term debt. In 1997, the amount of total external
debt was 6.7 times and the amount of the short-term debt was 2.6 times larger than that of the
international reserves. After the crisis, Korea has taken a series of measures to improve this situation,
including lowering the debt ratio of chaebols, eliminating cross-debt guarantee, concentrating on core
business, and purchase of non-performing loans, etc. The amount of bad loans as a percentage of total
loans dropped from 12.9% in December 1999 to 5.01% in September 2001. The debt ratio in
manufacturing sectors decreased from 400% in 1997 to 200% in 2000.

The Production System

Taiwanese and Korean MNCs have actively sought multi-nationalization of their activities since the late
1980s but in different patterns and therefore own different abilities to take advantage of new global
opportunities.

In terms of area, the majority of Taiwan’s investments went to China and Southeast Asia (52%), and the
purpose of investing is to avoid increasing production costs for their labor-intensive goods. Although
large in number, these MNCs have little significant meaning in enhancing Taiwan’s ability to cope with
globalization, being limited to neighboring countries and still being engaged in production. Foreign
investments of Korean companies are spread all over the world and range from acquiring raw materials
to market expansion. Korea invested a large amount in the OECD countries. From 1997 to 2001, Korean
investment in Asia only accounted for 33% of all outward FDI, while investment in North America and
Europe jumped to 45%. Marketing and research were the major functions carried by these investments.
Due to chaebols’ selling networks worldwide and each major company having its own global marketing
channels, they can easily distribute their products overseas. Korean MNCs are more prepared than
Taiwanese ones to grasp the fruits of globalization.

A country’s inward FDI is also an indicator of the impact of globalization. Greater FDI inflows means that
a country owns stronger competitiveness that foreign investors would like to explore. Another important
variable influencing inflow of FDI is government restriction, which reduces the opportunities of
technology upgrade stimulated by foreign companies and the chance to attract more foreign capital.
Korea’s Economic nationalism and fear of foreign dominance resulted in a strong tendency to refuse FDI
entry. Taiwan held a much more open attitude toward FDI. Many studies show that technological
development in Taiwan benefitted a lot from the presence of foreign companies. On average, inward
FDI/GDCF (gross domestic capital formation) ratio in Taiwan was much higher than in Korea. After the
financial crisis, Korea changed its strategy to actively absorb FDI. This made the ratio of Korea increase
rapidly from 0.7% of 1991-1994 to 13.6% of 1999-2000, contributing to the successful recovery of the
Korean economy.

A third way to explore the possible responses of a country's producers to globalization is examining the
mode of their business. Companies engaging in consumer markets have benefited more from
globalization than have the ones in the OEM (original equipment manufacturing) markets, partly because
accompanying the enlargement of the global markets, marketing costs (advertising and distribution)
become increasingly high. Superior brand-images of existing global marketing giants assist their products
to be accepted by the customers of new markets, quickly occupying them. In Romania, for example, IBM
was the leading computer seller in 1996, and in Poland, Hewlett Packard secured 73 percent of the ink-jet
printer market in 1997. In other words, globalization offers existing large firms more chance to bring
their superior marketing capability into full play.

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On the other hand, companies with only good production ability (e.g. OEM producers) need to be
subject to frequent challenges of globalization. Under the trends of global technology diffusion and ever-
changing production conditions, it is relatively easy for a new OEM firm to enter the market and for
competitors to take away the advantage on production of existing firms, especially second tier NIEs with
a much lower labor cost. In Taiwan, the personal computer industry had been recognized as one of the
most successful industries in selling products with their own brand names (OBM, Original Brand-name
Manufacturing), instead of OEM (37%) in 1988. However, this situation tremendously changed during the
1990s. By 1997, at least 61% of Taiwanese export computers were sold on an OEM base. It indicates that
Taiwan have encountered serious difficulty when they tried to market their own products and develop
their own global strategies.

In contrast, Korean major electronics firms have experienced a rapid increase in OBM production during
the 1990s. In 1997, Samsung made 80 percent of its products under its own brand name, a sharp increase
from 1993’s 55 percent. LG Electronics, one of the major electronics firms with a high OEM ratio in Korea,
reduced their OEM business from 52 percent to 40 percent between 1995 and 1997. Global strategies not
only create new sources of competitive advantage, but provide a better foundation for proactive
innovation instead of passive response to foreign OEM customer requests. In the new global economy, a
firm with less innovation ability will suffer huge disadvantage in international competitiveness.

The Development of the New Economy

With globalization, the capacity of innovation becomes a crucial source of competitiveness, and
strengthening the capacity is a necessary approach to cope with globalization. The other important
element of the new economy is the application of information and communications technology (ICT).

For a long period of time, the R&D expenditure in Korea was higher than in Taiwan. The expenditure in
Korea by percentage of GDP is 25% higher than Taiwan. However, if we look into the composition of R&D,
we can find that in the manufacturing sector, Taiwan invested more portions in high-tech industry than
Korea. In fact, in 1999, Taiwan spent 58% of its total R&D expenditure in high-tech manufacturing, and
there was 48% in Korea. In terms of numbers of patents granted by the USPTO, Taiwan is better than
Korea. In 2001, the number of patents granted to Taiwan was 6,545, ranking the fourth, comparing to
Korea’s 3,763 and the eighth place. However, the number of patents increased faster in Korea than in
Taiwan. From 1990 to 2001, the average increase rate in Taiwan was 20.25%, while in Korea, it was
26.24%. According to an analysis by USPTO, in 1999, the major technological fields in which Taiwanese
enterprises obtained the patents were semiconductor device manufacturing, electrical materials, static
information storage and retrieval, and chairs and seats. For Korea, they were liquid crystal, cell, elements
and systems; static information storage and retrieval; semiconductor device manufacturing; dynamic
magnetic information storage or retrieval.

With regard to the application of ICT, Korea is well known by its widespread of the use of the Internet. It
has the largest portion of national population who are Internet users in the world. Taiwan is also in the
list of the first tier countries, but it still lags behind Korea. The percentage of the broadband users among
population is 51.7% in Korea and 18.2% in Taiwan. This is partly attributed to the promotion of the
Korean government since the financial crisis. Compared to Taiwan, Korea spent more money on R&D, but
most concentrated on the businesses that chaebols focus on. Judged by the wide range and variety of
Taiwan’s patents, Taiwan’s R&D may cover different fields of industries. The high number of patents
indicates a country’s innovative capacity. In addition, Korea’s advance in ICT application provides it with
a solid foundation to cope with globalization. No matter in terms of production, marketing, or
communication, the Internet is a necessary tool to extend business operation to the globe.

12
The Human Development Index (HDI)

The Human Development Index (HDI) is a composite statistic used to rank countries by level of
"human development". The HDI is a comparative measure of life expectancy, literacy, education and
standards of living for countries worldwide. It is a standard means of measuring well-being,
especially child welfare. It is used to distinguish whether the country is a developed, a developing or
an under-developed country, and also to measure the impact of economic policies on quality of life.

The HDI combines three dimensions:

 A long and healthy life: Life expectancy at birth

 Access to knowledge: Mean years of schooling and Expected years of schooling

 A decent standard of living: GNI per capita (PPP US$)

Advantages Disadvantages
Easy measure and indicator ofpolitical Does not take into account poverty or other
competitiveness measures of deprivation
Reliable factors and indicators PPP values change quickly and are likely to be
misleading
Easy to collect data Does not account for equity – GINI coefficient
Signifies future welfare – education and health Quality of life not closely linked – does not
are both supply side policies account for factors like war or oppression
Able to measure success of government policies Human development is overall difficult to
measure, even with selected indices
It is one value – allows for modelling and Assumes ceteris paribus – an isolated snapshot
statistical analysis, thus practical in time

Goodhart’s Law: Any observed statistical regularity will tend to collapse once pressure is placed upon
it for control purposes (1975).This has made the HDI potentially an unreliable indicator of
development once countries begin to target only these indices.

TYS Questions

2007 H2 Q5 Either: Give the meaning of the term development gap. Describe the development gap
experienced within one world region. [9m]

2008 H1 Q7 Either: How useful is the HDI as a measure of economic development? [9m]

2008 H2 Q5 Either: In 2002 the World Bank reported that in the 1990s, although the number of extreme
poor (those living on less than US$1 per day) had decreased by 120 million, about 2 billion people “had
been left out of the process of globalisation.” Explain why the impact of globalisation is uneven amongst
LDCs and NIEs. [16m]

2009 H2 Q5 Either: In the UN list of HDI values for 177 countries in 2004, Norway, a DC in Europe, was
ranked first with 0.965 and Niger, and LDC in Africa, was ranked last with 0.311. Assess the usefulness of
HDI and of one more other indicators which may be use to measure development. [16m]

2010 H1 Q7 Or: Using examples to illustrate your answer, describe and explain what is meant by the term
newly industrialising economy (NIE). [9m]

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New International Division of Labour

 Discuss the causes for and impact of the emergence of the new international division of
labour on the global economic activities.

NIDL

It is the global spread of labour-use across international borders in the face of increasing
globalisation and industrial competition. It is the spatial division of labour which occurs when the
process of production is no longer confined to national economies. This has led to a trend of
transference, or what is also known as the "global industrial shift", in which production processes
are relocated from developed countries to developing countries. This is because companies search
for the cheapest locations to manufacture and assemble components, so low-cost labour-intensive
parts of the manufacturing process are shifted to the developing world where costs are substantially
lower. Companies do so by taking advantage of transportation and communications technology, as
well as fragmentation and locational flexibility of production. From 1953 to the late 1990s, the
industrialized economies' share of world manufacturing output declined from 95% to 77%, and the
developing economies’ share more than quadrupled from 5% to 23%.

Characteristics of NIDL

It is TNC driven, as they have the capital required for global investments.

Hierarchical and tri-partite in relationship: core (DCs, HQ and R&D), semi periphery (NIEs, regional
HQ) and periphery (LDCs, manufacturing plants)

Capital accumulation of profits is greatest at the top of the hierarchy, where R&D is located

Dynamic relationship – Producers at DC level can quickly and efficiently organise actors at LDC level
to maximise efficiency in the search for cheaper factors of production

Causes of NIDL

PULL Factors
Search for - Labour cost in China is estimated to be 33 times lower than the US for textiles
cheap and - Vietnam’s factory wages of around $50-$60 a month, which is half that of Chinese
efficient workers in manufacturing centres along China’s coast, hence is attractive to even Chinese
labour firms
Search for new - Larger the size, more potential demand to be tapped. Also, demand for goods is likely to
markets be labour intensive manufactured goods, and less of skilled manufactured goods and
services
- China, due to its size. Larger consumer market, growing purchasing power of population.
- Cosmetics market 13bn in first half of 2010, leading firms like L’oreal and Olay to enter
Chinese market in terms of shifting production and other processes
- Between 2002-2007, the Chinese car market grew by 21% on average, and is expected to
grow tenfold by 2030 from 2009, even as it became the largest market for automobiles in
the world
- Reduces supply chain and inventory supply risks

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 - Reduces transport costs
- Localising products to local markets – Lexus in the US luxury car market
Economies of - E.g. Walmart – cheaper prices overall
scale - Wal-Mart's growth between 1985 and 2004 resulted in food-at-home prices that were
9.1% lower and overall prices (as measured by the Consumer Price Index) that were 3.1%
lower than they would otherwise have been
- It distributed its merchandise from a vast network of distribution centers served by a
private truck fleet, allowing them to restrict inventory while simultaneously open more
stores. The inventory control system gave it another competitive advantage on the
competition. Distribution channels were very efficient and allowed for lower pricing, thus
creating another barrier to entry for firms who wished to enter the market.
Less - Hazardous industries such as textile, petrochemical and chemical production, as well as
environmental smelting and electronics, have migrated to Latin America, Africa, Asia and Eastern
and legal Europe. E.g. Union Carbide’s methyl isocyanate incident in Bhopal, India, killing 15000
concerns and affecting 800000 more.
- In Indonesia, no rules or codes of conduct are observed, and workers work ridiculous
overtime shifts, up to 24 hours at a go.
Little or weak - Mexico has poor government regulations on workers’ rights. In some cases, TNCs can get
labour unions away with not compensating workers for any accidents caused by the companies.
Employers prefer to have women labour force as they are either not unionized or
organized by weak state-controlled unions.
- In 1968, Singapore enacted a law that curtailed worker benefits and gave more power to
companies to hire and fire, making the Singapore workforce more attractive to TNCs.
Role of state - In 1995, the Namibian government passed a law called the export processing zone Act as
part of its strategy to become an internationally competitive investment location. The
government hoped that EPZs would attract foreign investments to Namibia, and boost
the country’s manufacturing capacity.
- EDB Singapore in 1961 developed Jurong Industrial Park – tax incentives, ready-made
factory building attracted Texas Instruments in 1969, as well as National and Fairchild
shortly after.
Actions of - Places which already have a suitable trained workforce for a high-technology industry
economic  Toyota chose the Burnaston site in Derby for its first factory in the EU for its long

agents (TNCs) tradition of engineering and vehicle manufacturing and favourable working practices,
as well as the excellent skilled and flexible workforce there – more than 20000 suitable
job applications from workers living in the area
- Cheap Land in declining industrial areas
 Toyota build their plant in Burnaston on a disused airfield

- Well-developed transport facilities to market areas

 Toyota chose the UK as it had reliable industrial transport links to customers
- Supply chain concerns – faster delivery, efficiency
 U.S. Block Windows ships acrylic blocks within four days, as compared to 12-16 weeks

with outsourcing to China

- High unemployment, providing a good labour supply
 Second Toyota plant in the EU, Valenciennes in France had an unemployment rate of

20%, hence high government grants of 60 million and other training aid
- Past economic problems so the government is willing to offer financial help
 Nissan received 125 million from UK to encourage them to set up a plant

- Establish operations within trade barriers, thus avoiding quotas and import duties
 Suzlon and Vestas, Indian and Danish wind-turbine makers make investments in U.S.

manufacturing not only because it’s expensive to ship turbines, but also for the
turbines to be perceived as “American” to officials involved in green purchasing
- Focus on the tastes of local people, known as host market production, and be more
visible to the area’s consumers, increasing sales
 To gain a higher share in the US domestic luxury car market, Toyota introduced a
separate brand called Lexus in 1989. This has now become the most popular luxury car
brand in the US, and Toyota introduced it back to Japan in 2005

15
 - Collaborate with other companies located there
 HP and Canon and their product design
 HP and Chinese government firms

PUSH Factors
High labour costs - For DCs, on top of paying high labour costs, the average employer has to pay
and unionisation another 20-25% of the worker’s wage rate for insurance and medical benefits. In
LDCs, only 2-5% at most is required. Also, union strikes were unheard of, and
workers even willing to work for overtime pay.
- Manchester, Liverpool and unions in France have lobby power and influence wages.
Saturated markets - Due to market penetration already maximized and home market already well
and product life saturated with products, further expansion opportunities are only available
cycles overseas. Hence firms regionalize and globalise. e.g. consumer durables.
Low productivity - Older manufacturing firms in DCs in Europe operated with outdated machinery and
methods of production, like Fordist-style. Inefficient use of labour, with high costs.
Depletion of raw - Heavy industries like iron and steel. Exhaustion of raw materials and cheaper raw
materials materials in LDCs led mining to become unattractive in the UK and Europe, causing
many miners to lose their jobs.
- US: Pittsburgh Steel lost 130000 jobs between 1965-1985

Global Shift and NIDL – Some Definitions

Deindustrialisation: contraction of manufacturing activities such as construction, assembly
industries, leading to unemployment. Comes about as a result of falling demand, exhaustion of raw
materials, high operating costs and stronger competition.

Outsourcing: contracting out a business function, normally previously performed in-house, to an

external provider.

Offshoring: relocation by a company of a business process from one country to another—typically

an operational process, such as manufacturing, or supporting processes, such as accounting.

Rationalisation: closure of a factory in a multi-plant firm due to cost-cutting measures, mostly.

Reindustrialisation: effort to attract high-tech manufacturing industries (as a result of skilled labour)
back to a once reindustrialised area using perks and benefits (tax holidays, ready-made factories)

Tertiarisation: transition (impt: maturing of economy seems to be a requirement for it to be

considered tertiarisation. Tonga’s major industry is tourism, but it is a result of colonisation and FDI)
of an economy from emphasis on manufacturing industries to service industries e.g. tourism, retail,
transport. Normally requires high levels of education and training to be sustainable.

Global Spatial Distribution of NIDL

 Headquarters - Core
o Located in DCs
o Contains higher value operations such as research and development, concentration
of talent and power
 Nike employs 23 000 people directly in the core and semi-periphery
 Regional Headquarters – Semi-periphery

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 o Located in newly industrialized country or BRIC or DC
o Regional administration, marketing and logistics
o Mid-level operations, uses local talent along with foreign professionals
 Nike’s sub HQ’s are in Brazil and in Europe
 Standard Chartered private banking HQ in Singapore
 Manufacturing – Periphery
o Located in LDCs
o Lower-order, less valuable activities
o Branch plants/offices
 Nike employs 660 000 contract workers from outsourcing, mainly in the
periphery
o However, rise of TNCs in LDCs like China – Geely/Volvo, Lenovo/IBM

NIDL’s Impacts on LDCs

Positive Effects

- More employment opportunities. From 1953 to the late 1990s, the developing economies’
share of world manufacturing output more than quadrupled from 5% to 23%
- Increase in standard of living
- Technological and skill transfer

Negative Effects

- Limited to selected labour intensive industries

- Tech and skill transfer is limited
- Subject to TNCs restructuring and organising themselves
- Economic and political dependency

NIDL’s Impacts on DCs

Positive Effects

- Tertiarisation and beyond, focusing on higher value industries

- More competitive product pricings (outsourcing, offshoring)
- More profits

Negative Effects

- Loss of lower-level jobs like in manufacturing, deindustrialisation (Detroit’s car

manufacturing, Rust Belt). The industrialized economies' share of world manufacturing
output declined from 95% to 77%.
- Deskilling of workforce
- Social-political resentment towards LDCs, protectionism (EU)

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NIDL and Uneven Industrialisation – Link to the Development Gap

Why have some countries benefitted from globalisation much more than others?

1) Geopolitically stable economies. Globalisation tends to favour countries without civil strife,
wars, terrorism, social safety issues. This is because investors are less likely to invest in such
problematic countries, thus widening the development gap, as countries with such problems
are likely to be LDCs.
2) Competent governments. Business companies shun countries which are rampant with
corruption, red tape and bureaucracy. Again, these are likely to be LDCs because of such
corrupted / communist countries.
3) Good and reliable infrastructure. Many Sub-Saharan African nations do not have necessary
infrastructure like roads, communications etc. to support large scale manufacturing and
investments. Landlocked regions with no airport facilities are also hindrances. LDCs do not
have the required technology to begin with, but globalisation favours and benefits countries
with technology, trapping these LDCs in a vicious cycle.

Relevance of NIDL today

The first wave of NIDL was a shift from the DCs of USA, England and so on to the cheaper locations
like China, India and Bangladesh. However, how these previously peripheral countries have
industrialised as a result of the 1st wave. They have become the core/developed countries, which are
now the leaders of the 2nd wave of NIDL.

Critique of NIDL

The theory of NIDL assumes that countries are passive subjects, but in reality states play a large role
in attracting foreign investments.

TYS Questions

2007 H1 Q7 Either: With reference to examples, consider the extent to which the NIDL has been
responsible for the global shift of economic activities in the last 15 years. [16m]

2008 H1 Q7 Or: Using examples, distinguish between the processes of de-industrialisation and re-
industrialisation. [9m]

2009 H2 Q5 Or: With the help of one or more examples of a TNC, explain how its spatial organisation
reflects the NIDL. [16m]

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Impact of New Technologies on Work

 Analyse the impact of the new technologies on work.

Economic practices change and morph over time. Globalisation spurs innovative practices, which in
turn spur globalisation.

1. Fordism / Just-In-Case (JIC) Production

 Mass production of standardised goods on assembly lines with strong hierarchical systems of
reporting, checking and auditing.
 Focuses on minimising uncertainty.
 Strong labour unions.
 Specialised, planned, internal R&D departments.
 Practice of storing a relatively large inventory in case of a sudden increase in demand.
Characterised by large assembly lines, large number of workers, large storage spaces and
warehouses.

Fordism and Globalisation:

Such low-end, repetitive and labour-intensive jobs are easily replaceable and offshored to LDCs,
leading to rationalisation and de-industrialisation in the DCs. Skilled workers become ‘de-skilled’ as a
result of rationalisation. ‘Re-skilling’ and a mindset shift is required to adjust to the structural
change in the economy.

2. Post-Fordism / Flexible Production Systems

 Highly efficient in material, space and labour usage to maximise value and product
differentiation.
 SMEs play a larger role than TNCs in performing flexible, highly specialised activites.
 More networking between firms as it is based on inter-dependency.
 Less structured than Fordism – lesser hierarchy, increased self supervision and responsibility
 Features Just-In-Time (JIT) production. Labour supply closely adjusted to demand through
part-time workers, multi-skilled workers or hire-and-firing workers.
 JIT production can occur within the main firm or outsourced to another.

JIT Production

JIT is defined as a form of manufacturing where goods are produced in quantities just enough to
meet the demand for it, leaving little in excess supply in terms of inventory.

It is often practiced in highly volatile and ever-changing electronic industries where product life
cycles (PLCs) change very quickly.

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Example: Zara stock upgraded every other week, time between execution and conception only 5
weeks while GAP takes about nine months for this process.

Advantages of JIT Disadvantages of JIT

- Delivered quickly, cost savings on storage space - The entire supply chain cannot fail
- Quickly manufactured under shortest possible - May not be able to meet unexpected demand
time surges
- Value-added by giving customers latest product - Requires a waiting period for customers since
- Takes advantage of changing PLCs to earn more everything is built ‘last-minute’
profits – responsive to market changes
- Adjusts labour based on demand – part-time or
multi-skilled workers

Outsourcing

Outsourcing refers to parent firms abandoning a part of its operations and hiring third-party firms to
do these jobs for them. Outsourcing can be done locally, regionally or internationally.

Outsourcing allows resources to be better allocated due to better business focus and division of
labour. It attempts to save costs without sacrificing on quality as much as possible.

An immediate consequence of outsourcing is the loss of jobs in the parent firm. In Singapore, SATS
(Singapore Airport Terminal Service) and SIA (Singapore Airlines) have both outsourced various non-
core operations, retrenching a large number of workers.

Advantages:

 Reduces capital inputs of setting up new plants, buying new machinery etc. by hiring existing
manufacturers. No need to own the factors of production.
 Able to shift operations quickly to find the most efficient subcontractor. Spatial mobility –
footloose.
Disadvantages:

 Quality of products might be compromised since QC may not be strictly enforced.

 Unpredictability of local conditions and factors such as labour.
 Possible leakage of confidential information such as production methods – the fake Nike
shoes produced in China and Vietnam are as good as the official ones, just cheaper and not
branded with the official logo.

Examples of outsourcing:

Iomega: Iomega Asia- Pacific used to own everything, including manufacturing plants, but now it
sells its zip drive manufacturing plant to Venture Cooperations in Malaysia for $18 million.

Flextronics: A Singapore based firm that does sub-contracting jobs. It is the largest provider of
contract electronic manufacturing and serves industries such as computer, communications,
consumer electronics and healthcare.

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Offshoring is different from outsourcing. Offshoring refers to shifting of factories to other countries
or areas under the same parent firm. The parent firm still owns the factories, so greater control over
quality is present, over managerial decisions. However, costs are involved in taking care of these
factories, such as time, energy, manpower and money.

Reverse Outsourcing

Host companies may sometimes reverse their decision to outsource their operations, getting non-
core jobs back into the parent company.

Reasons for reversing their decisions:

 Experience with outsourcing has not been beneficial – productivity and quality may have
fallen as a result of lack of control of operations.
 Erosion of branding as a result of lower quality.
 Acquisition of greater economies of scale (possibly through mergers) and able to bring non-
core jobs back into the parent firm.

Case Study: JPMorgan Chase

JPMorgan Chase used to outsource its IT operations to IBM. However, its merger with ‘Bank One’, a
smaller but efficient IT-based firm caused it to terminate its outsourcing IT-related operations with
IBM because of its gaining of greater economies of scale. It took back 4000 jobs which it had
transferred to IBM.

Small Office Home Office (SOHO)

SOHO allows people to set up their own firms/offices in their own homes with the advancement of
communications technology such as the Internet, faxes, scanners, phones etc. It usually involves the
tertiary/quaternary sector, favouring service-based industries such as consultation, web-designing
and artwork, as well as freelancers.

The advantage of SOHO is that it affords the comfort of working at home, as well as relatively low
start-up costs. SOHO also results in the decentralisation of services from the city centre as a result of
better transport as well as communications technology.

Cell Worker (Multi-skilled workers)

In the face of outsourcing and greater competition as a result of globalisation, firms have begun
training their workers to multi-task. Instead of doing just one job, they are trained to operate in
more advanced tasks and functions, usually with technological help. Some countries as a result bring
outsourced operations back into the home country.

Although they cost more in wages, they also have increased productivity per worker. E.g. 1 cell
worker in Japan equals 6 lower skilled workers in Malaysia. Panasonic has begun to use the concept
of cell workers, saving jobs in Japan. Kenwood re-shifted its manufacturing out of Malaysia back to
Japan despite higher wages, because of Japanese workers’ productivity, saving costs. Another
example is Tribon Bearing Electronics in the US, maker of parts for aircraft engines, which also uses
the cell worker concept.

21
The cell worker concept is relatively new – not every firm will be using it, largely because it involves
a large amount of money to retrain workers.

JIC and JIT – Hybridisation of Systems

As an evaluative statement, firms nowadays are not purely Fordist or post-Fordist – rather, they are
within a spectrum. In reality, firms fall somewhere in the middle of the two extremes of either
hierarchy or flexibility. Firms practice a balanced combination according to what benefits them the
most. For example, they may practice JIT, but not assimilate a culture of empowerment among all
employees where anyone can freely contribute.

3. Established or Innovative Economic Practices

Strategic Alliances

Two or more businesses join together to offer a broader set of skills and services to clients, to the
mutual benefit of the companies involved. An alliance between companies which provide different,
but complementary, services or products creates an advantage over competitors by broadening the
scope of their operations. Examples include the ‘Star Alliance’ of airline carriers, which include SIA,
Thai Airways and Virgin Atlantic. Membership to the Alliance gives passengers access to shared
private lounges, frequent flyer points etc.

Joint Ventures

Partnering with other firms to amass the capital required for a project. Common with larger projects
such as damn-building or petrochemical plants, which involve huge sums of money as start-up costs.

Many LDCs opt for joint ventures today with TNCs, as these partnerships allow them a fair share of
the profits as well as transfer of skills and technology.

Both alliances and joint ventures allow for firms to gain greater economies of scale, internationalise
their production and integrate functions for larger profits. Thus, firms become more interconnected
as a result.

Examples of joint ventures include Shell and Petronas in Iraqi oilfields, Alibaba and Yahoo in China in
2007, Dow Chemical and Corning for Dow Corning Corporation.

Business Networking

A culturally embedded concept, especially in Asia. It is established and widely practiced in Asian
societies like Hong Kong, Japan, Korea and China. Japanese keiretsus and Korean chaebols are
examples of such networking.

In this case, it is ‘who you know’ that drives economic decisions. Reliance on local partners and
forming close relationships with them help to minimise risks in highly uncertain business
environments.

22
Mergers and Acquisitions

M&A refers to the aspect of corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies that can aid, finance, or help a growing
company in a given industry grow rapidly without having to create another business entity.

Such a strategy also helps companies to gain further economies of scale. Examples include
MittalArcelor, HP-Compaq, Lenovo-IBM, Geely-Volvo, and ExxonMobil.

TYS Questions

2008 H2 Q5 Either: With the help of examples, describe and explain the impact of new technologies on
work in the manufacturing industry. [9m]

2010 H1 Q7 Either: Distinguish between the terms de-skilling, re-skilling and multi-skilling and explain
why such changes have become important in the global labour market. [9m]

2010 H2 Q5 Or: Discuss some of the ways in which firms seek to ensure their competitive edge in the
global economy. [16m]

23
Impact of Global Economic Change

 Discuss the impact of global economic change on the service sector.

 Discuss the growth and locational shifts in various economic activities.

The Rise of New Service Sectors – Quaternary and Quinary Sectors

Sectors of industries as classified:

Primary – extractive industries (mining, forestry, agriculture)

Secondary – manufacturing and processing industries (car manufacturing, ship building)

Tertiary – general services (administration, finance, banking, insurance)

Quaternary – a subsection of tertiary: encompasses knowledge-based sections of the economy such

as information services and technology, education, consultancy and R&D

Quinary – a subsection of tertiary: includes health, culture, research and other government-led
industries

The Reason for the Expansion of Higher Order Industries

Economic development – as countries and industries develop and mature, industries change to look
towards higher order sectors. The growth of industries has been greatly accelerated by the process
of globalisation, due to rising incomes and expectations, increased standards of living as well as
higher levels of education and literacy among the workforce.

The progress of economic development is delineated by Rostow’s model.

The spatial division of industrial sectors can be generally seen to progress from LDCs to DCs, with
increasingly higher order industries being of larger focus the more developed the economy is.

As such, industries like R&D are more prominent in the more economically advanced DCs, due to
their highly educated workforce, growing middle class and rising incomes. Examples include Silicon
Valley in the US. Singapore is also building such hubs, like the Biopolis and Science Parks.

A Look at Higher Order Industries

The quaternary and quinary industries are generally “Inventing and Thinking” in nature,
encompassing things like R&D, biomedical and pharmaceutical industries, education sectors and
government planning departments. The concept itself may be closely linked to what Richard Florida
(2002) terms the “Creative Class”, which is a socioeconomic class consisting of knowledge-based
workers whose main job is to think, be creative and innovative. Examples of such people include
scientists and university researchers.

24
Locational Trends in Services

Decentralisation of Service Industries

The recent trend in services is that they have been suburbanising, relocating away from the city
centre to the suburbs. This is largely due to improvements in transport and communications
technology as a result of globalisation.

The main services which have suburbanised are smaller, more knowledge-based services such as
graphic and interior design and architecture. This is linked to the rise of SOHO. These smaller
services have no need for the high accessibility city centres afford due to the rise of communication
technology.

On the other hand, key services such as banking and headquarters of major firms are still located
within the CBD. Central economic and government systems are still located centrally because they
require the accessibility, centrality, proximity to other functional links and prestige-of-name which
the city centre affords.

Some sectors which have decentralised: The Singapore Science Park, which includes Reuters,
Seagate and DSTA. Another example is the Pittsburgh Suburban Business Park in the US, which
house R&D facilities, finance and administrative services.

Globalisation of Service Industries

The globalisation of services entails the outsourcing of services as well. While previously, it was
largely manufacturing, non-core jobs which were offshored and outsourced, a number of factors
have allowed and are the impetus for the globalisation of tertiary service industries as well.

1) The development of information technology. Some service-based processes can be done

overseas through NIDL, such as finance, software development, accounting, data entry and
call centres. India is a prominent example of business process outsourcing, notably call
centres. In 2005, the size of business process outsourcing in India was US$5.7 billion, and
had grown 44.4% from the previous year.
2) Growing quality of labour in LDCs. Higher education and literacy rates in what used to be
LDCs such as India and China allows for the progress in industries to higher sectors. Thus,
service sectors can also be outsourced to firms in these countries.
3) Growing ‘standardisation’ of service products. Due to globalisation, people’s needs have
been generally standardising over time. This allows for similar service products to be
outsourced overseas, and also allows for greater economies of scale to be gained.
4) Service diversification of manufacturing firms. Diversifying itself is a method of lowering risks
for a firm. Manufacturing firms such as Wing Tai Apparels have branched off into property,
hospitals and F&B markets. An increase in wealth leads to this diversification, which fuels
the globalisation of such services.
5) Rapid growth of international trade of goods. The trade of goods also leads to requirements
for supporting service sectors in other countries, such as logistics, administration, transport
and regional support centres, which many firms such as HP have.

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New Industries as a Result of Global Economic Change

The Rise of SMEs

Small and medium enterprises (SMEs) are classified as businesses with 50 (small) to 200 (medium)
employees. They come about as a result of the maturing of the economy and increasing literacy
rates, and are normally in the services sector. Due to their small size, they are highly versatile and
adaptable to changes in market conditions, and often foster a spirit of innovation and enterprise
within the business and between the employees. They also have great potential for growth.

Due to increasing demand for specialised goods in mature economies, SMEs provide specific services
and serve specific needs. The small nature of SMEs makes it so that they require a supportive and
stable environment to flourish, and this is often provided by the government. Government agencies
such as Singapore’s SPRING Singapore provide venture capital for start-ups, provide connections,
financing and networking assistance to SMEs, and overall cultivate an entrepreneurial culture in the
economy.

As such, SMEs have become an important sector in some economies today. For example, Singapore’s
SMEs contribute up to 25% of GDP, as well as provide employment for 62% of the workforce. SMEs
are also a key segment of the Mexican economy. As of 2006 there were about 4 million enterprises
in Mexico – 99.8% were SMEs. About 52% of the Mexican GDP is generated by SMEs. They
contribute 72% of the formal employment in Mexico.

In Mexico, SMEs are termed PyMEs (Spanish: pequeña y mediana empresa). The Mexican
government has many programs to assist the growth of PyMEs, including Proyectos Productivos
(Productive Projects), which helps to finance investment projects that improve the competitiveness
of PyMes. This helps to trigger the creation and maintenance of jobs and regional development. The
most important project is the financing. These funds are mostly targeted to production projects. The
projects have to help by developing, expansion and consolidation of the enterprises.

Another program, the SPyME (Subsecretaría para la Pequeña y Mediana Empresa) was created to
promote, encourage, and design tools and programs with the purpose of creating, consolidating and
developing micro, small, and medium enterprises in the international market.

The Creation of Hubs

Hub creation is a marketing strategy – the concentration of similar activities in one area allows for
grater information exchange and cooperation, a cluster of industries which generates more
economies of scale than a single one. This is often spearheaded by governments, who have the
ability to allocate the land required to set up such hubs. It is also a strategy to attract more foreign
firms into the country – this is often coupled with incentives to locate in the hub.

For example in Singapore, Jurong Island is touted as a petrochemical hub. The ASTAR is also termed
a biomedical research hub. Singapore is also looking to be an education hub with the building of
more universities such as the SUTD, and even enticing schools such as the Tisch School of Arts to
come to Singapore. Collaborations such as Duke-NUS and Yale-NUS are also occurring.

26
Another example is the Silicon Valley itself. Its location and growth encouraged by the presence of
investors. Local universities like Stanford and Berkeley provide the talent. Its advantages included a
high availability of capital, and firms were attracted by its prestige. It had a previously large and
pleasant working environment, and there was access to cheap labour for assembly of products. Fast
communication networks led to rapid growth of market demand. But now, due to lack of space,
rising labour and land costs and a high social stress culture has led to diseconomies. This led to the
dispersal of firms: Apple now has branch plants in Ireland and Singapore. Increasing social
segregation and inequality between skilled and unskilled workers also occurred.

The Deregulation and Privatisation of Public Services

Increasingly, there is the trend of government firms privatizing to allow for more competition. This is
to achieve greater efficiency and productivity of these sectors, and to benefit the consumers and
citizens more.

Examples of some sectors are telecoms (Singapore Telecoms becoming Singtel, and Starhub and M1
have entered as competition), environment (SembCorp) and electricity (Singapore Power, Keppel
Energy and Senoko Power).

By privatizing, the market is open for more competition, even global competitors. The result is more
competitive pricing as well as variety and value-added services for consumers (such as the various
plans and packages offered by Singtel and Starhub). The key contention with privatizing such utilities
is that people wonder whether basic needs like energy should indeed be served by economic agents
with a focus on profit motive instead of working for the benefit of the people.

TYS Questions

2007 H1 Q7 Either: Outline the differences between the terms tertiary, quaternary, and quinary, as they
are applied to the service sector of the economy and briefly account for their recent growth. [9m]

2008 H1 Q7 Either: With reference to examples you have studied, examine the impacts of global
economic change on the service sector of employment. [16m]

2008 H2 Q5 Or: Explain the meaning of the terms quaternary sector and quinary sector. Using examples,
describe recent changes in either one of these sectors. [9m]

2009 H1 Q7 Or: With reference to an area or areas you have studied, distinguish between the terms
quaternary and quinary sectors of economic activity and explain their growth. [9m]

2009 H2 Q5 Or: Outline the nature of the research and development industry (R&D) and suggest reasons
for the global inequalities in R&D expenditure shown in Fig.5. [9m] (no figure attached here)

27
2. Transnational Corporations

Characteristics, Spatial Organisation, Linkages with Host Economy

 Discuss the characteristics of TNCs.

 Discuss the spatial organisation and structure of TNCs.
 Discuss the command and control relationship between TNCs and the host economy.
 Analyse the social and economic impact of TNCs on the economies in which they operate.
 Discuss the role of governments in attracting investments.

Characteristics of TNCs

A TNC is a firm with two or more branch plants across international boundaries, usually organised in
a spatial hierarchy of control and production, with main HQs in the home country and production
plants in host countries. Very large TNCs are powerful economic forces that affect the economic
fortunes of many countries by the way they make their locational and investment decisions.

Diverse product range. Many TNCs have a wide range of products and brands, maybe even different
sectors of the economy under one name. This diversification assists in gaining economies of scope
and scale. Examples include Unilever (which owns Lipton, Lux and Axe), General Motors (Chevrolet,
Daewoo, Vauxhall) and Yamaha (musical instruments, motorcycles).

A powerful economic force. Due to large market share and revenue size, where TNCs decide to
locate their operations and investments has large impacts on both their home and host economies.
For instance, the top four seed TNCs control 53% of the global proprietary seed market: the leader
Monsanto – accounts for 23% of this market. They also directly employ around 45 million people and
provide jobs indirectly for millions more. In the mid 1990s, employment stood in excess of 73 million
people in TNCs. TNCs control 75% of world trade, and their incomes are even greater than the GDP
of some countries. Combined annual incomes of Ford and GM in the early 2000s are greater than
the GDP of the whole of Sub-Saharan Africa. As a result, major TNCs which contribute large
proportions of GDP have gained leverage over the governments in countries, especially those with
weak governments prone to corruption, such as Shell in Nigeria.

Controller of foreign direct investment. The spatial distribution of TNC investment is selective and
uneven. They are focused on three main regions: Europe, East Asia and America, mainly because
these are the locations with stable governments and economies which are either mature or have
great potential for growth. The African continent is often neglected due to this and not being in
close proximity to most DCs. The decisions of TNCs have thus served to widen the socioeconomic
gap in the world. Apart from that, TNCs make FDI decisions which are beneficial to them, like the US
investing in countries with which it has free trade agreements, or South Korea investing in the US
because of its historical ties as an ally in the Korean War.

Internationalisation of the operating process. For many TNCs, their operations are spread out
across the globe, closely related to NIDL. Their operations will be located in the places which have
the best comparative advantage, like labour-intensive manufacturing in LDCs with cheaper and more

28
abundant labour and the main HQs and R&D located in home DCs, where more capital, skilled labour
and better technology is available. Regional locations and HQs will also be present to cater to
regional needs better, and these are often located in NIEs of that region.

Global mindset, not homogeneity. While TNCs and businesses in general are perceived as
homogenous profit seekers, TNCs in fact have to adapt their operations to suit the local culture in
order to gain more profits. Thus, TNCs differ from location to location, their structures and
operations often reflecting the society they operate in. In France, ‘McDonald's added tablecloths and
candles to improve the ambience at some eateries and introduced waiter service at certain outlets
because they found that most Europeans prefer leisurely rather than fast food dining’. In addition to
space, McDonald’s has changed its menus from one country to another, offering food that locals
usually eat.

The home culture of TNCs also affects the way they behave. Korean chaebols and Japanese kereitsus
place a lot of emphasis on respect and loyalty, and are unified by tradition and custom rather than
cross ownership. They provide a great variety of goods and services and are picked by MITI (Japan)
or EPB (Korea 5-year plans) and supported by government financing and protective barriers (tax
credits, low-interest loans, tariff reduction to encourage investment in the company and export
industries in general), yet they are highly competitive as they are forced to immediately export,
hence competing with international exporters. US TNCs have a “hire and fire” culture, which is
completely opposite to the trust based system of some Asian businesses.

Spatial Organisation of TNCs

As mentioned, TNCs organize their operations spatially according to what benefits them the most
and what strategies they are pursuing. However, in general, how they delineate their processes is as
follows:

Core Headquarters and Main R&D – Home Countries. Often located in developed, home countries,
HQs are the ‘nerve centres’ of TNCs where they are at the top of the command structure. Key
decisions and strategies are formed in these HQs, such as investment, production and research
decisions. Being the apex of management and financial controller, HQs require strategic locations in
major areas such as global cities which provide access to high-quality services, skilled labour and
infrastructural and communications support. For example, BMW is headquartered in Munich, the
third largest city and a major financial centre in Germany.

R&D encompasses product development, new technologies and operational research. As a result of
the importance of earnestly developing new products and services, the most important R&D takes
place in home countries as well, due to similarly higher skilled labour, supporting technology and
infrastructure. Monsanto’s R&D HQ is located in St Louis, Michigan.

Regional Headquarters and Operations – NIEs. In order to facilitate processes in regional areas
away from host countries, regional headquarters are ideal. Due to some managerial decisions also
being decided here, as well as regional R&D located here, local DCs or NIEs with the required capital,
infrastructure, accessibility and potential for growth are desirable. For example, Singapore alone is a
major destination for many regional hubs in SE Asia, including LinkedIn, Rohde and Schwarz, and
Rolls-Royce’s Marine headquarters.

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Logistics, Branch Plants and Periphery Operations – LDCs. It is the most spatially mobile part of
TNCs largely because of its homogenous requirements, and periphery operations not requiring the
advanced supportive infrastructure and skilled labour. Instead, comparative advantage is desired
with cheaper, lesser skilled labour and lower support services (transport and logistics) required.

Impacts on Host Economies

Positive Effects on Host Economies

Positive Economic
Direct job creation via - Many labour-intensive jobs created, such as in manufacturing.
employment - Shell has employed 5000 locals directly to work in its oil extracting plants,
and employed another 20000 people indirectly, increasing employment in
the local delta area, increasing per capita income
- Nike employs 660 000 workers indirectly to do contract manufacturing
work
- Coca Cola directly employs 13 800 workers in China
- Sime Darby, a Malaysian agricultural TNC, plans to develop Guthrie
Rubber Plantations in Liberia, providing 20 000 jobs
- In 1972, Jurong Industrial estate housed 417 plants employing 48 000
people, all employed by TNCs
Industrial linkages – - Primary industries like rubber production can increase profits by
multiplier effects, supplying their rubber products to the manufacturing plants for the
collaboration production of Nike products
- Coca Cola has an estimated multiplier effect in China of 414 000 people
- In 2010, Shell set up a 12 billion US dollar joint venture with Cosan,
Brazil’s biggest sugar and ethanol producer, contributing 1.6 billion in
cash for uses such as biofuel research. This JV also allows for better
economies of scale
Transfer and improvement of - Japan’s MITI taking IBM technology blueprints for Japanese firms
technology - Farmers in India taking Monsanto’s gene technology via cross-breeding to
improve their other crops
- In Nigeria, Olam (Singapore) provides farmers with all inputs, including
certified herbicides, crop protection chemicals, fertilizers and sprayers,
and its foreign affiliate runs a model farm for capacity-building seed
multiplication
Skill transfer - In Chinese manufacturing in the period 1993-1999, there was a positive
effect on domestic industries from TNC activities. Those enterprises with
foreign ownership or foreign ownership/capital structures did better
- Intel, IBM, Microsoft and Texas Instruments invested in research centers
in India to train and employ thousands of Indian engineers at low costs
Economic improvement - In Nigeria, oil exports by Shell is a very important part of the country’s
economy, accounting for 20% of GDP and 95% of its export earnings
- In 2002, Toyota exports in UK made a 500 million pound net contribution
to UK balance of payments
- Coca-Cola spent 8.16 billion RMB in 1998 alone
- With about 1200 million worth of FDI coming into Singapore in 1980,
TNCs controlled 74% of manufacturing output, and 58% of workers in
manufacturing centre, and even 75% of all capital expenditure in the
sector.
Positive Social
TNCs engaging local - Dow Chemical contributed $500000 to Habitat for Humanity China for
communities their Post Flood Rehabilitation program through Save and Build. Homes
were rebuilt for 110 families in Guangdong Province in China.
- Citibank pioneer funder of microfinance programs in various ELDCs, give

30
 small loans of US$100 to start business
- NIKE loans to women in Thailand to set up businesses
Increasing incomes and social - People living on less than a dollar a day reduced from 79 to 27 percent in
welfare China, 63 to 42 percent in India, and 55 to 11 percent in Indonesia
between 1981 to 2000
- Housing area per capita in urban areas has grown from 6.1square meters
to 26 square meters from 1980 to 1995
Positive Environmental
Environmental programmes - Reclaim previously degraded land using high technology remediation
by TNCs schemes which host country does not have the resources to do on its
own, such as reforestation in the Amazon
- A 1997 study by Eseland and Harrison found that foreign-administered
plants in Mexico were statistically correlated to be significantly less
pollutive than local plants, possibly as they had the necessary capital

Negative Effects on Host Economies

Negative Economic
Exploitation of cheap labour - In LDCs, the local labour force is often exploited with long working hours
and low rates of pay. Young children are often employed and
membership of unions is not allowed. Skilled and managerial positions are
often filled by people from the country of origin.
- Some claim human rights violations of such TNCs, such as Namibia’s
Ramatex factories, who do not provide workers with protective masks.
- In Indonesia, after the rupiah collapsed in 1998, Nike did not adjust the
wages of workers in their offshore factories, essentially underpaying
them.
- Weak unions mean that jobs have little benefits or insurance, no job
security or compensation.
- Very little of final price of good makes its way to the worker in LDC –
uneven distribution of profits. Only 12% of a pair of jeans, 3.9% of a bar of
chocolate goes to the main producer. The rest goes to transporters and
retailers.
Profit repatriation - The only money going to the host countries are wages, taxes and other
programmes which the TNCs have contracted with the government. The
rest is mostly repatriated.
- In Nigeria, only 13% of oil revenues make their way to the locals.
Minimal skill transfer - Most of TNCs’ investments are “assembly” jobs which require low-level,
repetitive skills, so the locals don’t actually learn very valuable skills.
Examples are packing and assembly, textile industries and Nike factories
in Vietnam.
Footloose nature of TNCs - TNCs can easily pull out of economies if they find other places which are
cheaper, more efficient, or which benefit them more.
- TNCs are often more concerned about profits than workers and overseas
branches are often the first to be closed in times of financial crisis.
Decisions are often made for the benefit of the country of origin due to
foreign decision makers
- Local resources are exploited and production is not based on local needs
but their earning potential in a world market
- Loss of jobs in host economy due to pulling out of TNCs
- Economic repercussions on countries heavily dependent on TNCs
- Many TNCs left Singapore for China in the 1990s due to cheaper labour in
China, such as Maxtor. This led to structural problems in the economy, as
well as a loss of 5000 jobs from Maxtor alone.
Stifle local enterprises, - Squeeze out local competitors, leading to dependence on TNCs for

31
increasing dependence, employment and revenue. Local companies unable to compete with the
economic dominance foreign TNCs, and hence close down, and TNCs might use this power to
gain monopoly.
- When a Wal-Mart opens in a new market, median sales drop 40% at
similar high-volume stores, 17% at supermarkets and 6% at drugstores
- U.S. counties with Wal-Mart stores suffered increased poverty compared
with counties without Wal-Marts. This could be due to the displacement
of workers from higher-paid jobs in the retailers customers no longer
choose to patronize, Wal-Mart providing less local charity than the
replaced businesses, or a shrinking pool of local leadership and
reduced social capital due to a reduced number of local independent
businesses.
- Cartels collaborating to drive out competition, such as chaebols (e.g.
Samsung) stifling smaller TNCs in Korea.
Negative Social
Health risks due to - Health and safety issues of the factories that TNCs set up are often
environmental effects neglected, resulting in a host of health problems
- The aforementioned Ramatex, where workers managing textiles have
developed chest problems or allergic reactions. Costs are not covered by
the TNC.
- Bhopal in India, 1984, a gas leak from a pesticide plant in the heart of the
city killed many thousands of people and injured half a million people
Programs support TNCs at - Grants given to TNC by government could be better spent directly on
expense of citizens helping the locals, such as local housing, diet, sanitation, than on indirect
development by encouraging foreign investment
- Government often pursues policies that benefit the TNC, so as to ensure
that they stay, but in the process of doing so, hurt the locals, such as by
relaxing legislation and workers’ rights. In Nigeria, the government and
TNCs benefit financially, but locals do not directly benefit, instead lose
out. The local people used to only receive 3% of revenue from oil
Consumerist culture - TNCs promoting cultural lifestyles which support their own industry and
thus increase their profits.
- Nike may promote a fashionable culture in such LDCs, or McDonalds
might promote a fast food culture.
- These ‘cultures’ not only damage local culture, but alter their needs to
benefit the corporations.
Negative Environmental
Severe environmental - LDCs do not enforce legislation concerning the environment, so to cut
degradation costs, TNCs often do not dispose of waste properly, and just discharge it
into the environment, polluting water bodies, etc.
- Overexploitation of indigenous resources can also lead to environmental
problems.
- Overlogging of the timber industry in the Amazon, as well as clearing of
land for soya production to feed animals for meat. Between 1991 and
2000, the total area of rainforest destroyed rose from 415,000 to
587,000 km².
- In Nigeria, lax policies have increased air pollution, with gas flaring a
common practice
- Monsanto dumping of PCBs and other poisonous materials at Brofiscin
quarry in Newport, Cardiff, England

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TNC Case Studies

Ford

Global Structure

 American TNC
 World’s 3rd largest automaker
 Operates in over 200 countries
 Headquarters in Michigan, USA
 Research takes place in more industrialized nations eg. USA, Japan, UK
 Car assembly in Germany, Spain, UK, Belgium, Brazil, China
o China: reap gains from market with increasingly affluent middle class
 Component manufacture in Malaysia and the Philippines: cheaper labour and land cost
 Diversify locations to reduce risk of strikes to operations
 Corporate growth accentuated by increasing global connectedness through acquisitions,
mergers and alliances
o Eg. early 1990s, Ford acquired the British firm Jaguar
o Eg. joined with previous rivals – Chrysler and General Motors – to produce a car that will
use less energy, cause less pollution and challenge the dominance of Japanese and
Korean manufacturers

Impacts

 Economic
o Spain’s economic modernization: offered opportunities for participating in a rapidly
expanding domestic market and served as a base for further export and trade with EU
countries
o Bought parts from India, fuelling growth of Indian’s automobile industry
o Local labour along the maquiladora in 1980s
o Automobiles more affordable
o Poorly paid labour force eg. workers in Mexico in 1983 paid <$3/h compared to US
workers who are paid $23/h
o Repatriation of profits
o Footloose nature: can suddenly pull out and cause widespread retrenchment
 Social and environmental
o Improvement in technical skills of locals
o Improve transport system and lives of people
 Launched a road safety fund in the Philippines, which supports the
Responsibility in Driver Education Program, hoping to reduce traffic fatalities
there
o Ameliorate problem of pollution
 Ford Ikon, developed for the Indian market, emits 40-60% less than legal limits

33
Mitsubishi Motors Corporation

Global Structure

 Japan’s 5th largest automobile producer

 3 head offices in Japan, North America and Australia
 Research and development, product testing in Japan, North America and Germany
 Manufacturing in the Netherlands, Japan, North America, Thailand, the Philippines and Australia

Impacts

 Economic
o Direct job creation
 Eg. expansion of Mitsubishi Motors plant in Illinois, USA in 2003 provided 300
new jobs in the manufacturing sector
o Tax revenue which can be channeled into public projects like education and healthcare
to aid national development
o Transfer of technological skills and nurturing of local talent in the automobile industry
through joint ventures
 Eg. 22-year long partnership with Proton of Malaysia from 1983-2005 to develop
Proton’s first product, the Proton Saga
o Consumers have greater variety of products to choose from
o Footloose nature: at risk of losing jobs
 Mitsubishi Motors decided to close down its Lonsdale plant in Adelaide,
Australia in 2004 due to global debts, causing 650 workers to lose their jobs
o Profit repatriation, so host countries only receive a small percentage of profits earned
o Competition to local firms
 Environment
o May have outsourced to LDCs to evade strict environmental regulations to save
production costs – may cause environmental damage
o But Mitsubishi Motors has set behavioural standards to reduce emissions of greenhouse
gases and maximize efficient use of natural resources

Nokia

Global Structure

 World’s largest mobile telephone manufacturer

 Headquarters in Finland
 Customization and logistics centre in US
 Research and development in Finland, Japan, China, USA, Germany, Hungary
 Production units in Brazil, China, Finland, Germany, Great Britain, Hungary, India, Mexico, South
Korea
 Against outsourcing production stream so that they can control the quality of its products

34
Impacts

 Economic
o Teams up with local small-medium enterprises in host countries to help develop local
SMEs and help Nokia understand how to better market their products to penetrate into
the market
o Job opportunities
 Eg. established 5 research institutions and 4 production bases
o Transfer of technology
 Social
o Provide solutions for the locals
 Eg. Nokia teamed up with the Grameen Foundation to provide
telecommunication services to rural villages in LDCs
 Environmental
o Nokia ranked as the top mobile and PCs producing company by Greenpeace
International based on their practices to eliminate harmful chemicals and on taking
responsibility for their products once they are discarded by consumers

Walmart

Global Structure

 World’s largest retailer

 Headquarters in Arkansas, USA
 Regional outlets in Central America (Guatemala, Honduras), Europe (UK), Canada, Asia (Japan,
China)
 Manufacturing plants in Jordan

Impacts

 Economic
o Provides jobs and reduces poverty
 Walmart is the largest private employer in the US and Mexico
o Provides goods at lowest prices possible
 Eg. Global Insight recently released a study which found that Walmart saved
each American household on average $2329 in 2004
o Poor working conditions and standards: lowly paid yet subjected to long working hours
of up to 20h a day, lack of workers’ welfare as they will be severely punished for any
minor mistakes made
 Political
o Policies against labour unions: risk that the welfare of workers would not be protected
due to disallowance to unionize
 Environmental
o Stockpiling tons of lawn and garden products on pallets outdoors results in chemicals
washing into storm drains when it rains, affecting drinking water
 Eg. fined $1m in civil penalties for violating Clean Water Act

35
Kraft

Global Structure

 Largest food and beverage company in the US

 Headquarters in Northfield, Illinois, US

Impacts

 Social
o Ensure sustainability of agricultural systems which are vital to Kraft’s own supply chain
 Eg. program in Guinea to improve cashew growers’ productivity by teaching
them effective management techniques, raise standard of living of farmers,
promote sustainable usage of natural resources
o Promotes healthy lifestyles by funding public education drives
o Lack of concern for consumers’ health
 Eg. Ritz crackers tested positive for GM soybeans when it is supposed to use only
organic ingredients
o Strike by Kraft employees to protest against unwillingness to negotiate with workers on
issues like low wages and discrimination
 Environmental
o Protect biodiversity
 Eg. won the Rainforest Alliance “Corporate Green Globe” in 2005
o Drawn up Environmental Performance Indicators for areas such as resource usage and
waste management
o Released toxic fumes and waste into Boston area and fined $250 000 in 1993

Transnational Corporations Case Study – Dow Chemical

Dow Chemical is a provider of plastics, chemicals, and agricultural products with presence in more
than 175 countries and employing 46,000 people worldwide. It spends more than $1 billion annual
expenditure in R&D. Its stated mission is: "To constantly improve what is essential to human
progress by mastering science and technology" with the vision: "to be the largest, most profitable,
and most respected chemical company in the world".

Spatial Organisation of Dow Chemical

The Dow Chemical Company has its world headquarters located in Midland, Michigan in the United
States of America. Also, Dow Chemical has manufacturing, business centres, sales offices and
research and development facilities located in North America, Europe, Latin America, India, Middle
East, Africa and the Asia Pacific region.

Major production sites are located in:

United States: Plaquemine, Louisiana; Hahnville, Louisiana; Midland, Michigan; Freeport,
Texas; Seadrift, Texas; Texas City, Texas; South Charleston, West Virginia
Canada: Fort Saskatchewan, Alberta; Prentiss, Alberta
Germany: Boehlen; Leuna; Rheinmuenster; Schkopau; Stade
France: Drusenheim
The Netherlands: Terneuzen
Spain: Tarragona

36
Argentina: Bahia Blanca
Brazil: Aratu

Also, locations of plants and holding are as follows:

United States: 42 manufacturing locations in 16 states
Canada: 6 manufacturing locations in 3 provinces
Europe: 49 manufacturing locations in 16 countries
Latin America: 26 manufacturing locations in 5 countries
Asia Pacific: 22 manufacturing locations in 8 countries
India, Middle East and Africa: 5 manufacturing locations in 4 countries

Linkages

Subsidiaries

 Dow AgroSciences is a wholly owned subsidiary specializing in agricultural chemicals, seeds

and biotechnology solutions.

 Union Carbide Corporation is a wholly owned subsidiary and is a chemical and polymer
company.

 Rohm and Hass is a wholly owned subsidiary which manufactures miscellaneous materials
like industrial, electronic goods and pharmeceuticals.

 ANGUS Chemical Company is a wholly owned subsidiary specializing in providing

nitroalkane-based chemistries and its derivatives, like paints and metalworking fluids.

Joint Ventures

 Dow Corning Corporation is an equally-owned joint venture of Dow Chemical and Corning. It
specializes in silicon and silicone-based technology, like sealants and lubricants.

Impacts

Social Impacts on Host Economy

 The Dow Chemical Company has been a supporter of Habitat for Humanity International
since the early 1980s. These include:

- Dow committed to be the official supplier of STYROFOAM™ Brand Insulation for all
Habitat homes built in North America.

- Dow contributed $500,000 to Habitat for Humanity China for their Post Flood
Rehabilitation program through Save and Build. Homes were rebuilt for 110 families in
Guangdong Province in southern China.

Economic Impacts on Host Economy

 In Indonesia, by working with other chemical companies, Dow has launched a training
program that prepares Indonesian people to assume positions of technicians and operators
in their plants, thus helping the native population and economy by increasing the skill levels
of the people, enabling them to be better employed.

Environmental Impacts on Host Economy

37
  Dow’s chemical-manufacturing plant at Fort Saskatchewan, Canada has been accused in
three occasions of releasing chlorofluorocarbons in the atmosphere. CFCs are known to
deplete the earth’s ozone layer and their use and production within the US is not permitted.
Dow pleaded guilty for the actions of the plant and agreed to pay a total of $300,000 in fines.
In 1995 the plant released 458kg CFCs during plant maintenance and during 1996 an
additional 1800kg due to a valve leak.

 A subsidiary, Union Carbide, had caused the infamous Bhopal methyl isocyanate gas leak in
India, 1984, which killed some 15,000 people and left another 800,000 suffering from the
after-effects of inhaling toxic fumes. Dow Chemical, who bought the company in 2001,
inherited the after-effects of the Bhopal incident, but they have not claimed responsibility
for it yet.

TYS Questions

2007 H1 Q7 Or: With reference to one TNC,

a) Describe its spatial organization and its structure [9m];

b) Evaluate its social-economic impact on a country in which it operates. [16m]

2009 H1 Q7 Or: “Many TNCs and smaller firms have adopted a policy of outsourcing their production and
services in the last ten years.” Why has this policy been adopted and with what consequences? [16m]

2010 H2 Q5 Either: Assess the impacts of the activities of one named TNC on one country in which it
operates. [16m]

38
3. Role of the State and Supranational Bodies

 Examine the role of the state in economic development.

 Evaluate the effectiveness of the state in economic development.
 Discuss the role of supranational bodies and evaluate their impact on national and regional
economies.

States and Supranational Bodies

State: an organized body of people under a single government, operating within a defined and
established geographical boundary.

Supranational body: organized body of people operating across geographical boundaries,

transcending national spheres of interest.

Role of the State in Economic Development

The State as a Regulator

In order to achieve the most efficient and most beneficial processes, the government plays an
important role in regulating economic activity within the country. Its key roles as a regulator are to
adjust policies, investment strategies, negotiate terms, all in order to benefit local businesses and
the country. The main aim of such regulation is to ensure stability, politically, socially and
economically, in order to increase competitiveness.

Regulation of wages. In order to ensure a decent standard of living for all citizens, as well as to
minimize unfairness, governments can intervene in the labour market with wages and incomes
policies. Examples include setting minimum wages to try and ensure people earn at least a living
wage to support themselves. For example, the federal minimum wage in the US is $7.25 per hour.
States can also regulate their own minimum wage, even adjusting the policy itself – Wisconsin
proposed a regulation to index minimum wage every year and adjust from there, in order to
alleviate the impact of inflation on minimum wage. Singapore does not have minimum wage
regulations, but the National Wage Council gives recommendations on adjustment of wages. For
example, in 2011 the NWC recommended an increase in workers’ wages in accordance with the
strong economic growth of 14.5% in 2010. Also, in 2008, due to high inflation and uncertain
economic outlook, the NWC generally recommended companies to give sustainable wage increases
commensurate with the companies’ performance and business prospects, as well as recommending
further top-ups to CPF for lower wage, contract and informal workers to assist them further.

Regulation of competition. States can promote or maintain market competition via regulating anti-
competitive conduct, such as attempted collusion, monopoly, predatory pricing, or mergers and
acquisitions. Competition law is intended to increase consumer welfare and promote efficiency. For
example, the Competition Commission of Singapore (CCS) issued an Infringement Decision on SISTIC
for abusing its market share of around 90% of the ticketing market to raise its prices, levying it with a
penalty of $989000. In the US, such laws are known as antitrust laws. In 1999, a coalition of 19 states

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and the federal Justice Department sued Microsoft for anti-competitive behaviour. A trial found that
Microsoft had strong-armed many companies in an attempt to prevent competition from the
Netscape browser.

Regulation for protection. In order to combat the footloose nature of TNCs, some countries have put
in place regulations to protect local firms and industries. Protectionism itself is inherently against the
concept of free trade, so governments are also able to institute laws which are anti-competitive by
nature in order to protect local companies. For example, some countries might make it a
requirement for foreign TNCs investing locally to source a certain percentage of their production
materials or capital from local firms, such as Nestle in Korea being required to use Korean-made
machinery. This is in order to increase the multiplier effect of TNCs on the local economy, reducing
profit leakage overseas.

There is also the “Infant Industry Argument” for protectionism, where protectionist measures are
made to nurture newly started companies in the country by restricting competition from abroad. For
example, from 1816 through 1945, tariffs in the USA were among the highest in the world, and they
successfully industrialized behind such protection. Also, during the 1980s Brazil enforced strict
controls on the import of foreign computers in an effort to nurture its own "infant" computer
industry. The effects of such protection vary – companies can find ways to bypass these, or it may be
a case of government failure, where governments do not have knowledge on whether such infant
industries may be successful. The Brazilian computer industry never matured; the technological gap
between Brazil and the rest of the world actually widened, while the protected industries merely
copied low-end foreign computers and sold them at inflated prices.

Regulation for environment. This is concerned with reducing negative externalities brought about by
environmental degradation. Due to processes like urbanisation and industrialisation, the need for
such laws is required to maintain and increase the standard of living and health standards for people.
Apart from that, environment laws are also advantageous to the image of the country in both living
standards and government policy enforcement, which in turn can attract more investors. For
example, Jurong Island is touted as a model of sustainable development, which will be achieved
through energy optimisation, water sufficiency via desalination and waste-water collection and
recycling, as well as enhanced efforts to reduce emissions and improve already high standards of
processing.

The State as a Competitor

Competing for investments. In order to gain advantages for the nation and the national economy,
the government creates and cultivates a suitable environment for investors, mostly via creating pull
factors, tax grants, subsidies, special economic zones and other carrots. Many economists credit
Ireland's growth to a low corporate taxation rate (10 to 12.5 percent throughout the late 1990s). In
the 1990s, the provision of subsidies and investment capital by Irish state organisations (such as IDA
Ireland) encouraged high-profile companies like Dell, Intel, and Microsoft to locate in Ireland. These
companies were attracted to Ireland because of its European Union membership, relatively
low wages, government grants and low tax rates.

EDB Singapore in 1961 developed Jurong Industrial Park. Tax incentives, ready-made factory
buildings attracted Texas Instruments in 1969, as well as National and Fairchild shortly after. 21

40
billion was invested by foreign firms in Jurong Island in 2000. Jurong Island in Singapore is home to
many companies in the petrochemical industry, like BP, ExxonMobil and Shell. The island also has a
network of pipelines that allows for seamless integration among companies. For example, Japan's
Teijin can receive piped-in chlorine produced by CIFE company and bisphenol A from Mitsui
Chemicals to make polycarbonates, showing the extent of linkage and infrastructural development.

Competing with other economies. The management of the economy as a whole and the achievement
of the macroeconomic aims are the key targets of any government. One of the main focuses, as such,
is the implementation of supply-side policies to increase the economy’s productive capacity and
quality to improve its competitiveness in the global economy. For example, increasing focus on R&D
– China doubled the percentage of its GDP invested in research and development from 0.6 in 1995
to 1.3 in 2005, while South Korea’s funding has risen from 9.8 billion in 1994 to 19.4 billion in 2004.
As a result, Asia’s share of global high-tech exports has grown from 7% in 1980 to 25% in 2001.

Apart from that, cultivating an entrepreneurial and innovative culture also increases the productivity
of the economy. Spring Singapore, a government arm of the Singaporean government spent 18.5
million in 2009 in helping SMEs start up and expand. Spending on education also raises the literacy
rate of the workforce, raising its level and helping it progress to higher-end sectors of the economy a
well as increasing incomes. In Singapore, studies show that an additional year of education increases
earnings by 13.2%, and every additional year of tertiary education yields 18.7% of increased earnings.
According to the World Bank 2007 report on globalization, rising education levels have boosted
Asian growth to up to 2 percentage points per year. FDI also favours countries with a higher
education rate because it is an indicator of a higher quality workforce.

The State as a Collaborator

Collaborating with other countries. International cooperation across geographical state boundaries,
such as the creation of Free Trade Areas, has become increasing useful in today’s economically
interdependent world. For example, the reduction of trade barriers in Free Trade Areas has seen a
greater mobility of trade as well as capital and labour moving across borders, resulting in greater
economic efficiency and an overall rise in income. CAFTA, The China-ASEAN Free Trade Area has a
combined gross domestic product of US$6.6 trillion (S$9.3 trillion), 1.9 billion people and a total
trade of US$4.3 trillion. The removal of trade barriers and standardisation across the EU makes it
much easier to access a giant market with huge potential.

However, there is a downside – one of the key arguments for protectionism is to prevent dumping of
cheap goods and predatory pricing. With trade barriers down, massive smuggling of goods from
China has disrupted practically all Asean economies. For instance, with some 70-80 per cent of shoe
shops in Vietnam selling smuggled Chinese shoes, the Vietnamese shoe industry has suffered badly.
In the case of the Philippines, the local shoe industry, along with the vegetable industry, has also
been hit badly by smuggling of Chinese goods. Indeed the range of goods negatively affected is
broad, including steel, paper, cement, petrochemicals, plastics, and ceramic tiles. Many Philippine
companies, even those that were competitive globally, had to close shop or reduce production and
employment due to smuggling.

Collaborating with TNCs. Essentially, governments initiate linkages with TNCs in order to integrate
their processes more with the local economy, creating technology and skill transfers as well as

41
ensuring profits. For example, government linked companies can go into joint ventures with foreign
TNCs. For example, the Sri Lankan government proposed to sign a US$425 million apatite mining
deal with two TNCs, USA’s IMC Agrico and Japan’s Tomen Corporation. Also, they can link up local
companies with TNCs in order to widen the base of the multiplier and trickle-down effect. The Local
Industry Upgrading Programme in Singapore has seen Apple, Microsoft, Oracle assist local firms by
providing technology access. In Ireland’s National Linkage Programme, local firms are connected to
TNCs, resulting in a 33% employment increase.

The State as an Employer

Employing the public sector. The government employ people in the public sector for a government
department or agency. Civil servant jobs are regarded as jobs with a good pay, decent safety net as
well as good benefits. With regards to the economy, the government can make use of the civil
service to alter the supply of jobs in the market. For example, in 2009, the Singapore Budget had a
section for increasing government hiring – 7500 jobs in teaching and support, 4500 jobs in
healthcare and hospital administration, 1400 for the Home Team, 2000 jobs for MINDEF and 2600
jobs for the rest of the public service. This serves as an injection of government spending into the
economy, as well as provision of jobs and income to keep the economy running, especially during
the financial crisis of 2008-2009.

Export Processing Zones (EPZs) – State-led Economic Zones

State led economic zones, such as industrial parks and EPZ, are spatial expressions of state
involvement in the economy. By building places such as hubs and zones, the government is hopefully
delineating and allocating land use efficiently, concentrating similar kinds of businesses together to
form linkages and economies of scale, as well as providing the necessary infrastructure and
providing tax reliefs or grants to attract investors to do business.

A free trade zone (FTZ) or export processing zone (EPZ) is an area of a country where some normal
trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered
in hopes of attracting new business and foreign investments. It is a region where a group of
countries has agreed to reduce or eliminate trade barriers. Free trade zones can be defined as labour
intensive manufacturing centres that involve the import of raw materials or components and the
export of factory products.

These zones are often used by multinational corporations to set up factories to produce goods. In
1999, there were 43 million people working in about 3000 FTZs spanning 116 countries producing
clothes, shoes, sneakers, electronics, and toys. The basic objectives of EPZs are to enhance foreign
exchange earnings, develop export-oriented industries and to generate employment opportunities.
Usually, these zones are set up in underdeveloped parts of the host country; the rationale is that the
zones will attract employers and thus reduce poverty and unemployment, and stimulate the area's
economy.

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Shenzhen Special Economic Zone. Special economic zones (SEZs) have played an important role in
advancing economic reform in China and in opening up its economy to the rest of the world. The
Shenzhen SEZ was the first SEZ to be setup in the PRC. Over the past few decades, Shenzhen has
developed from being a small fishing village in Guangdong Province into a major industrial and
financial centre, benefiting substantially from the liberal economic policies granted by the Central
Government to SEZs. Shenzhen's rapid development has showcased the advantages of “open door”
policies and market-oriented reforms, served as a “laboratory” for piloting policies, and propelled
economic development in the rest of the country.

Essentially, a SEZ is an administrative division: it can span an entire province, such as Hainan. SEZs in
the PRC tend to cover large geographic areas. Shenzhen, for instance, spans nearly 2,000 square
kilometres. A SEZ in the PRC is intended specifically as a pilot area in which comprehensive economic
reforms can be carried out and the zone opened up to the rest of the world economy. It is thus
mandated to “experiment,” and accorded the “the right to experiment” by the Central Government.
This is equivalent to granting a SEZ a high degree of autonomy in implementing economic policies
The PRC’s SEZs are located in coastal areas with easy access to ports and transport networks.
Moreover, they are specially set up in areas adjacent to the PRC's “internationalized” cities,
economic hubs, or neighbouring countries. Shenzhen borders Hong Kong, China. Finally, SEZs are
subject to “preferential policies” on land, taxation, customs clearance, the use of foreign capital and
profit repatriation by foreign investors, imports and exports, finance, and logistics.

During the last few decades, Shenzhen has developed at a phenomenal pace, now famously referred
to as “Shenzhen speed.” From 1980 to 2005, the average annual growth rate of the gross domestic
product (GDP) of Shenzhen was 27%. In 2006, Shenzhen's total GDP was $71.3 billion, ranking it
fourth among the PRC's rapidly growing cities, and very close to the third-ranked city, Guangzhou. Its
per capita GDP was ranked first in the country at more than $8,619 compared with the national
average of about $2,000.

Since 1979, Shenzhen's industrial base has continued to grow rapidly. The average annual growth
rate of industrial value added was 40.2% between 1980 and 2004. In 2005, telecommunications,
computers, and electronics accounted for almost 60% of the total industrial output in Shenzhen
Firms in Shenzhen have gradually established their own brand names. By the end of 2005, there
were five Shenzhen brands with sales of more than Yuan10 billion (about $1.25 billion). Huawei and
Zhongxing, both large manufacturers of electronic and telecommunications equipment in Shenzhen,
have become major suppliers in this sector not only in the PRC but also worldwide. In 1979, the
actual use of foreign capital amounted to $153.7 million; by 2006, it had reached $3.3 billion.
International companies of office automation in Shenzhen include Ricoh, Toshiba, Epson, Copier, and
Xerox. Their “Shenzhen plants” generate a total output equivalent to about 21% of the world's total
outputs by these companies. Other major investors include Wal-Mart, Compaq, Sony, Intel, IBM, and
Siemens. In all, 141 of the world's top 500 multinational companies have currently invested in
Shenzhen.

Many factors have contributed to the success and competitiveness of Shenzhen. First, the Central
Government has provided a special policy framework for the SEZ that has helped to create a “soft
enabling environment” to enhance the city's industrial competitiveness. As a SEZ, Shenzhen has
enjoyed by far the most liberal economic policies in the PRC, both in terms of attracting FDI and

43
engaging in international trade. Shenzhen has been a testing ground for comprehensive reforms. For
example, it was one of the first cities to apply differential corporate tax rates for foreign and
domestic firms. While foreign investors paid a nominal tax burden of 15% and an actual tax burden
of 11%, the corresponding figures for domestic investors were 33% and 23% respectively. The tax
burden of domestic enterprises was twice that of foreign investors' enterprises. As a result of an
open and liberal policy, the actual utilization of FDI increased by 10% annually from 1980 to 2006,
the value of exports reached $136.1 billion in 2006, while imports reached $101.7 billion.

Second, Shenzhen has been home to migrants from across the country and, more recently, from
overseas. The innovative spirit of the city stems in part from its vibrant and strongly motivated
migrant community, which account for 83% of the total population. Third, Shenzhen's enabling
financial environment ensures that finance is available even for relatively risky ventures. This has
been important for the city's industrial transformation, increasing its competitiveness. Indeed,
Shenzhen is the PRC's most active city as far as the availability of venture capital is concerned. By the
end of 2005, the number of venture capital firms in Shenzhen accounted for one third of the total
number in the whole country. The city also houses the Shenzhen Stock Exchange, the Shenzhen
Small and Medium Sized Enterprise Guarantee Centre, and other critical financial architecture.

Fourth, there is well established infrastructure in Shenzhen. Shenzhen's harbour ranks fourth in the
global container transportation business, and Shenzhen's airport ranks third in PRC, with 18.4 million
passengers in 2006. The supply and quality of other infrastructure, such as roads,
telecommunications, and utilities, also rank highly in the PRC. Fifth, Shenzhen enjoys the advantage
of location. As a coastal city bordering Hong Kong, China, Shenzhen's bid to upgrade its industrial
structure and competitiveness has benefited hugely from its proximity to Hong Kong, China as a
major international financial, information, and services centre. A large share of investment to
Shenzhen has come from Hong Kong.

Finally, the Shenzhen government is efficiently run, and apt to continuously reform and upgrade its
administrative capacity. The government has provided “convenient services,” through direct one-
stop services for large enterprises. Administrative transparency has improved over the years to
strengthen the government's accountability. For instance, a development plan formulated by the
Shenzhen government must be submitted to the People's Congress for approval. At the same time,
local opinion is sought and encouraged to increase the transparency and effectiveness of the
government decision making process. Business procedures in Shenzhen are simple and streamlined.
The Shenzhen government has also implemented personal service responsibility to ensure that
firms' applications for various categories of government approval are processed within a specified
period of time.

One of the most important factors helping to facilitate Shenzhen's industrial transformation has
been its ability to attract foreign investment. Output from foreign invested firms account for more
than 40% of Shenzhen's GDP. FDI policies in the PRC, and especially in its SEZs, have become
increasingly liberal These include: permission to set up wholly foreign-owned firms, enabling easier
access to land and infrastructure, allowing the repatriation of profits, and favourable export and
import polices.

Second, while FDI inflow was earlier concentrated in labour-intensive and small-scale operations,
increasingly large TNCs from technology-intensive industries have begun to enter the PRC. To

44
upgrade its industrial structure, the Shenzhen government has formulated a strategy to develop a
“headquarter” economy by inviting multinational companies to move their headquarters into
Shenzhen.

Third, industrial parks are an integral component of the Shenzhen SEZ. There are about 100
industrial parks located in the city, more than 90% of these located outside Shenzhen checkpoint ,
and about 70% based in villages and small towns. Shenzhen plans to integrate the existing parks and
develop 52 larger parks.

Fourth, Shenzhen encourages the formation of industrial clusters or concentrations to benefit from
economies of scale and scope. Various industrial clusters have been formed in the city, including
clusters for the garments, bicycles, furniture, and semi-conductor industries.

Fifth, in the last 3 years, in order to upgrade its industrial competitiveness, the Shenzhen Municipal
Government has proposed policies to develop a recycling economy, with the aim of improving the
city's environment and saving resources. On 16 March 2006, Shenzhen passed its Recycling Economy
Promotion Rules, enforcing more than 10 key procedures and systems to assess a firm's mid and
long-term performance and planning, and to provide government procurement and policy support
for developing industries that are environmentally-friendly and energy-efficient.

Sixth, in order to improve industrial competitiveness, the Shenzhen Government has decided to
implement a new innovation strategy in early 2006. The aim is to structure Shenzhen as a “National
Innovative City” in the PRC. Based on this decision, research and development investment will
account for nearly 4% of the city's total GDP by 2010. The output value of high-tech products is
expected to grow at an annual average rate of 20% over the next few years.

TYS Questions:

2007 H2 Q5 Either: Assess one or more of the strategies a country may adopt to try to ensure its
continuing competitiveness in the global economy. [16m]

2007 H2 Q5 Or: With the help of one or more located examples, describe the nature of EPZs and outline
why governments may develop them. [9m]

2008 H1 Q7 Or: With reference to one or more examples, critically examine the role of the state in
economic development. [16m]

2008 H2 Q5 Or: Discuss the role of different governments in attracting FDI. [16m]

2009 H1 Q7 Either: Discuss the extent to which the state has contributed to the process of globalisation
in the last 10 years. [16m]

45
Role of Supranational Bodies in Economic Development

Supranational bodies and intergovernmental organisations essentially play the role of a regulator in
the economy, especially since it is a medium for the many members of the body. For example, they
can regulate socio-economic policies or terms of trade between member countries. Normally, their
aim is to benefit and satisfy the most people possible through their regulations, but it is almost
impossible due to many countries having different aims during negotiations, as well as the real
danger of powerhouses abusing their major stake to shift and alter policies to benefit themselves.

Also, in the case of regional blocs like ASEAN or EU, greater cooperation and trust between the bloc
members can also result in increased trade, increased incomes and greater prosperity and economic
stability. However, this may create a bias towards the member countries, in terms of trade as well as
politics. Intra trade will be more profitable than external trade, which may lead to the possible
marginalisation of smaller, lesser developed countries not in such unions. Overall, it might inhibit
global trading, investment and competition by dividing the world economy into a few distinct blocs
within which only the member countries benefit.

Supranational Bodies as a Regulator

Regulation of trade. Supranational bodies, as a coalition of various governments, can negotiate

terms of trade with one another, often in pursuit of free trade by cooperating to reduce trade
barriers. Often, Free Trade Agreements will be negotiated between countries or blocs of countries,
such as the CAFTA or NAFTA. They also negotiate for the advantage of the world economy, including
assisting developing countries. For example, the WTO removed tariffs on goods flows worth 142
billion to developing countries, exceeding the 80 billion contributed by major industrialised countries
in 2005 in terms of aid. Also, the Uruguay Round of trade talks reduced agricultural subsidies from
the more developed nations by 20%, benefiting the poorer farmers in LDCs who cannot compete.

Regulation of political stability. Key to the idea of economic development is social and political
stability, since investments generally prefer countries with upright, more transparent, more effective
governments and no major social upheavals, to ensure stable economies and stable investments. For
example, ASEAN regulates and resolves political differences among countries, including territorial
disputes and the prospect of nuclear proliferation. It contributed a role in the UN Transitional
Administration in East Timor.

While it is much easier for countries to cooperate on economic issues due to relatively more
common goals, it is much harder to do so when it comes to politics, as a result of widely differing
viewpoints.

ASEAN

The Association of Southeast Asian Nations, commonly abbreviated ASEAN, is a geo-political and
economic organization of ten countries located in Southeast Asia, which was formed on 8 August
1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand (the old members, ASEAN-6).
Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and
Vietnam (the new members). Its aims include the acceleration of economic growth, social progress,

46
cultural development among its members, the protection of the peace and stability of the region,
and to provide opportunities for member countries to discuss differences peacefully.

Fundamental principles adopted by ASEAN:

 mutual respect for the independence, sovereignty, equality, territorial integrity, and national
identity of all nations;

 the right of every State to lead its national existence free from external interference, subversion
or coercion;

 non-interference in the internal affairs of one another;

 settlement of differences or disputes by peaceful manner;

 renunciation of the threat or use of force; and

 effective cooperation among themselves

Since the late 1990s, many scholars have argued that the principle of non-interference has blunted
ASEAN efforts in handling the problem of Myanmar, human rights abuses and haze pollution in the
region. Meanwhile, with the consensus-based approach, every member in fact has a veto and
decisions are usually reduced to the lowest common denominator. There has been a widespread
belief that ASEAN members should have a less rigid view on these two cardinal principles when they
wish to be seen as a cohesive and relevant community.

ASEAN – Promoting Intra-ASEAN Trade and Economic Development

Large market size. The ASEAN population is 468.9 million for the ASEAN-10. This increased market
size will increase intra-ASEAN trade. Average income in the new member countries is still low but
GDP growth rates are satisfactory, therefore the prospect of trade creation taking advantage of
market size is quite good.

Different comparative advantages between disparate economies. Another factor that will stimulate
intra-ASEAN trade is resource diversification. The structure of the economies of the ASEAN-6 is quite
similar and the scope of exchange is limited. The new members are different from the ASEAN-6 in
regard to factor endowments and patterns of production. These new members are rich in natural
resources, with low-wage labour forces, while the old members have higher-skilled labour and more
capital. Classical trade theory suggests that trade between two countries stems from the differences
in comparative advantage, which are determined by factor endowments. For example, countries
with abundant natural resources will export resource-intensive products and countries that are
relatively capital abundant will export capital-intensive goods. Economic integration has stronger
trade creation effects when resource endowments are more diversified among members because
the pattern of production is complementary among them. New members have comparative
advantages in agriculture and raw materials; while old members have comparative advantages in
manufactured goods. Therefore, integration widens the scope of exchange and increases intra-
ASEAN trade.

47
Tariff reduction. AFTA, which entails the elimination of tariff and non-tariff barriers, was launched in
1993, and the main mechanism of AFTA is the CEPT scheme. Unlike the EU, AFTA does not apply a
common external tariff on imported goods. Each ASEAN member may impose tariffs on goods
entering from outside ASEAN based on its national schedules. However, for goods originating within
ASEAN, ASEAN members are to apply a tariff rate of 0 to 5 percent (the more recent members of
Cambodia, Laos, Myanmar and Vietnam, also known as CMLV countries, were given additional time
to implement the reduced tariff rates). This is known as the Common Effective Preferential Tariff
(CEPT) scheme. Also, the CAFTA has slashed tariffs on 90% of traded goods.

Increased investment and tourism. The principal objective of AFTA is not intra-regional trade, rather,
the objective is to make ASEAN an attractive investment area. The newer members of ASEAN
present new opportunities for investment and tourism with a larger market, diversification of
natural resources, labour abundance, low cost of living, and numerous tourist attractions.
Investment in these countries will induce trade through imports of materials and machinery and
exports finished products. Infrastructure development, which requires large investments, and is
needed in the new member countries, also creates demand for imports of raw materials. For
example, investment in construction in Lao PDR increases exports of cement and petroleum from
Thailand. Tourism creates trade in services and demand for local souvenirs that can be developed
into exports.

Liberalisation and restructuring of new members. All new members have restructured their
economies from socialism to capitalism. AFTA forces the new members to adjust trade practices to
international standards. AFTA makes tariffs uniform in term of rates and classifications. Non-tariff
barriers have to be reduced and conformed to international regulations. The AFTA agreement also
includes cooperation on a customs area which includes activities such as the formulation of a
uniform ASEAN tariff list, building a green corridor for commodities participating in CEPT, and
coordination of customs forms and procedures. The reduction of tariffs will encourage competition
from imports. New members will have to make adjustments in production according to comparative
advantage with less protection. The external forces of freer trade will make the economy more
efficient and make exports more competitive, reinforcing the need to deregulate domestic
production.

Greater integration of economies. For the CAFTA, Beijing launched a US$10 billion infrastructure
investment fund to improve roads, railways and strengthen telecommunications links between
China and ASEAN. ASEAN countries can also latch on to China’s production network and increase
linkages with other economies.

Potential Economic Disadvantages of ASEAN

Forced economic restructuring. New member countries are concerned that tariff reductions will
decrease tariff revenue. The countries in Indochina still rely on tariff revenue. In Lao PDR, the
percentage of tariff revenue in total government revenue was 20.1 percent in 1995. The
corresponding shares were 28.3 percent in Vietnam and 54.1 percent in Cambodia. Due to this
concern, policymakers may delay tariff reductions, which will undermine regional trade creation. The
current account deficits in these countries make some people worry that tariff reduction will
stimulate imports and worsen the trade deficit. Recently, Vietnam increased tariff rates on cars,
motorcycles and consumer goods to slow down imports and improve the trade deficit.

48
Economic dominance by the stronger member states. A recent survey showed that 57.3 percent of
respondents believe the China-ASEAN free trade agreement (CAFTA) will disadvantage locals
because local products cannot compete with Chinese products. A lowering of trade barriers means
that the ones who can produce at a cheaper rate will benefit more, and generally these are the
countries who have already attained greater economies of scale. In this case of the CAFTA, some
local textile and food industries in Jakarta were flooded with cheaper imports from China. Also, freer
flow of labour will mean that some countries will lose jobs due to competition within the trading
bloc itself.

TYS Questions:

2007 H2 Q5 Or: Evaluate the role of supranational bodies in the economy of either a country or a regional
grouping of countries. [16m]

2010 H1 Q7 Either: Evaluate the impact of supranational bodies (trading blocs and international
institutions) on one national economy you have studied. [16m]

2010 H2 Q5 Or: Outline the ways in which membership of a regional bloc or regional grouping affects a
national economy. Support your answer with one or more examples. [9m]

49