Problems posed by TNCs in host countries

Serious claims are also being made against TNCs in host countries.

The most important of these claims is the dominant role of TNCs in the national economy. For example, even in a country as large as Canada, 60% of the capital in the processing industry is owned or controlled by foreigners. And 40% are American companies. This is all the more true for small countries.

Usually, the following negative aspects of foreign dominance in the national economy of other countries are noted:

TNC affiliates are often reluctant to export their products to countries that are unfriendly to the home government. It is also possible that exports will be hindered by an outright ban (embargo) in the home country; the desire of TNCs to obtain loans abroad in the presence of strict domestic financing conditions; the use of loans received in other states, if interest rates in the host country are low; ignoring national traditions in consumption, aggressive advertising of goods, the nature of which does not correspond to the tastes of the local population or contradicts the established customs.

Another negative consequence of the activities of TNCs in host countries is the transfer to the home country of financial resources intended for R&D. This hinders the technological development of the host country. This problem  is very relevant for developing countries and economies in transition.

TNCs also often use the host country’s domestic resources (both financial and human) that could be used by local enterprises, thus hindering the development of the latter. Through TNCs, the process of “brain drain” intensifies.

In cases where TNCs operate in commodity industries, claims against them in connection with low prices paid for the natural resources used, the use of capital-intensive technologies that are unsuitable and unprofitable for countries with an excess of unskilled labor, a one-sided, “monocultural” orientation of the national economy are common.

To a large extent, the claims against TNCs listed above are true, especially in the case of developing countries. In this regard, many countries are trying to regulate TNCs in order to mitigate the negative and stimulate the positive effects of their activities. Increased tax rates are applied if the share of national capital in local branches of TNCs is low. The sectors of the economy in which TNCs are allowed to operate may be determined. In some developing countries, only joint ventures are allowed, which implies equal participation of local and foreign capital. Rules are being developed governing the use of technology, training and use of local labor, the implementation of environmental enterprises, etc.  However, it should be borne in mind that excessive “overregulation” is fraught with a reduction in the inflow of foreign capital in the future.

Attempts to regulate the activities of TNCs and to develop a kind of code of conduct for them in the host country are also being made by various international organizations: the EU, OECD, UNCTAD. The latter developed recommendations for TNC affiliates and host Governments to establish linkages with local enterprises (Tables 4.5 and 4.6).

Table 4.5 Resource requirements by component

Measures of foreign branches to establish and deepen ties with local enterprises

Making new connections

Technology transfer


Exchange of information

Financial support

1. Publication of announcements about supplier needs and price and quality requirements that firms must meet.

2. Visits to suppliers’ production facilities and quality control.

Commodity technology:

provision of branded know-how relating to the production of goods;

transfer of product samples and technological specifications;

technical advice to suppliers to assist them in mastering new technologies;

providing information on the characteristics and quality of products to assist suppliers in improving them;

cooperation in the field of R&D.

Process technology:

provision of machinery and equipment to suppliers; technical support in the field of production planning, quality management, inspection and testing;

visits to suppliers’ production facilities to advise on

planning, operations and quality issues.

formation of “cooperation clubs”

To interact with suppliers on technical issues.

assisting employees in setting up their own firms.

Assistance in organizational matters and in matters of management know-how:

Assistance in inventory management (as well as in the  use of “off-wheel” supply systems and other systems).

Assistance in the implementation of quality assurance systems.

Explanations of the basics of the new practice,

such as network management or financing and procurement methods

organization of training courses for personnel on the basis of branches


providing access to in-house training programmes at branch offices or abroad;

dispatching teams of experts to supplier sites to provide on-site training;

facilitating the exchange of knowledge and experience between suppliers.

informal exchange of information on business –

plans and future needs;

provision of information on annual purchase orders;

Provision of market information.

Encouraging suppliers to join business associations.

setting special or favorable prices for

suppliers’ products;


suppliers in the organization of the normal movement of funds through advance purchases and payments,

prompt implementation of settlements and provision of foreign currency.

Long-term financial assistance through the provision of capital; guarantees on bank loans; the establishment of funds to finance working capital or other supplier needs; infrastructure financing; targeted financing of certain projects with suppliers; as well as


Source: UNCTAD, World Investment Report 2001.

Table 4.6 Resource requirements by component

Measures by Governments to establish and deepen linkages

Provision of information and assistance

in the search for partners

Technology Modernization


Financial Aid

Provision of information:

Distribution of brochures and brochures.

Constant updating of electronic databases.

Organization of seminars, exhibitions and missions to disseminate information on networking.

Assistance in finding partners:

Performing the functions of an honest broker in negotiations.

Providing support for the audit.

Advising on subcontracting agreements.

Sponsoring fairs, exhibitions, missions and conferences.

Organization of meetings,

Visits to production facilities.

technology transfer as a requirement for foreign investors;

partnerships with foreign affiliates;

creating incentives for cooperation in the field of R&D;

incentives provided by home countries.

encouraging the establishment of supplier associations;

cooperation with the private sector in the organization of a system of centralized services, including in the field of training;

support for private sector training programmes;

cooperation with international agencies.

legal protection against unfair conduct

treaty practices and other types

unfair business practices;

encouraging the reduction of late payments through tax measures;

limiting payment delays in

by law;

guarantees of repayment of deferred payments;

indirect financing  of suppliers through their buyers;

tax or tax rebates and other fiscal benefits for firms,

providing long-term financing to suppliers;

co-financing of development programmes with the private sector;

a direct role in providing financing to local firms;

mandatory transfer of funds from

foreign affiliates to local suppliers;

home country measures;

two-stage loans;

use of ODA.

Source: UNCTAD, World Investment Report 2001.

In developing the list of measures presented in tables 4.5 and 4.6, UNCTAD experts assumed that the interaction of local and foreign firms could solve a number of problems arising from the activities of TNCs and thereby reduce the negative impact of TNCs on national economies, while at the same time enhancing the positive effects. These measures themselves are the result of an analysis of international experience of effective and mutually beneficial cooperation of TNC affiliates with local firms and governments.  Summarizing the benefits arising from such cooperation, UNCTAD experts note that “such links provide benefits for foreign affiliates and domestic suppliers, as well as for the economy of the country where they are formed in general. For foreign affiliates, procurement from local suppliers can reduce production costs in host countries, where they are known to be lower, and allow for greater specialization and flexibility while better adapting technology and products to local conditions. The availability of technologically advanced suppliers can give foreign affiliates access to external technological and human resources and thereby fuel their own innovative efforts. The direct result of the impact of such linkages on domestic suppliers tends to be an increase in their production and employment. These linkages can also serve as a channel for the exchange of knowledge and skills between cooperating firms. A dense network of linkages can contribute to improving the efficiency of production activities, increasing production, building technological and managerial capacity, as well as diversifying markets for participating firms. Finally, for the host country as a whole, such linkages can stimulate economic activity and, where local resources replace imported ones, improve the balance of payments. Strengthening the position of local suppliers can, in turn, lead to the flow of tangible and intangible assets to the rest of the host economy and contribute to dynamic development.