What this lesson teaches
I can explain how states regulate TNCs and why their influence differs.
Syllabus 9173, Topic 1.2, 3. Relative Influence of Actors in Shaping the Global Economy. Can states influence economic activities?
Make a guess
Two governments both want a car factory. One has a large market and skilled workers; the other is desperate for any jobs. Which can demand stronger conditions?
- Neither, because TNCs can move anywhere quickly.
- The desperate one, because it needs the factory more.
- The one with the large market and skilled workers.
- Both equally, because states have the same power.
Show the answer
The one with the large market and skilled workers.
Firms cannot easily replace a big market or a skilled workforce, so that state has more bargaining power.
States can shape what TNCs do through rules and incentives, but how much depends on what firms need and what governments can enforce.
States are governments that rule a territory. They regulate business through taxes, labour and environmental rules, planning approvals and market access. They also attract firms with infrastructure, education and incentives. All of this changes a TNC's costs and risks.
Influence varies. A state with a large market, a rare resource or special infrastructure has more bargaining power, because firms cannot easily go elsewhere. A state with capable regulators can turn rules into real practice.
A state desperate for investment has fewer options. Firms may compare sites and demand tax breaks or weaker standards. But TNCs are not fully mobile. Factories, suppliers, skilled workers and customers can tie them to a place. Bargaining power shifts as these ties develop.
Good regulation attracts useful investment while protecting people and nature. A generous incentive may cost more public money than it brings in. Neither states nor TNCs control everything. Judge the actual local links, job quality and whether rules are obeyed.
- State tools
- Taxes, rules, approvals, infrastructure and incentives.
- Bargaining power
- Stronger with a big market or rare resources.
- Enforcement
- A rule only works if it is enforced.
Step by step
Find the state tool
How does a rule or incentive affect the firm?
Compare options
How easily can the firm move? How badly does the state need it?
Check capacity
Is the rule actually monitored and enforced?
Real examples to use
Samsung in Vietnam
Tax breaks and a large workforce attracted Samsung, which became Vietnam's largest foreign investor. Its phones form a big share of Vietnam's exports.
Worked example: Intel in Costa Rica, 1996-2014
In 1996, Intel chose Costa Rica for a chip assembly-and-test plant, if the country improved training, infrastructure and approvals. The government delivered, and building began in 1997. By 2005, Intel employed 2,900 people there. But assembly and testing ended in late 2014. The state could attract the investment, but could not guarantee it would stay.
Watch out for this
TNCs can move any activity immediately when a rule changes.
Moving costs money, and many operations depend on local markets, skills or infrastructure.
Check your understanding
A government sets strict pollution rules but rarely inspects factories. What is the main weakness?
- The state has no legal role in how factories operate.
- The rules are too strict for firms to follow.
- Its legal power is not turned into real control.
Show the answer
Its legal power is not turned into real control.
Yes. Rules need enforcement to work.