TNC participation in international production

The economic and financial crisis has significantly affected TNCs’ operations abroad. Foreign affiliate’ sales and value-added declined by 4-6 percent in 2008 and 2009. Since this contraction was slower than the decline of world economic activity, however, the share of foreign affiliates’ value-added (gross product) reached a new historic high of 11 percent of world domestic product (GDP). Besides Greenfield investments, any expansion of the foreign operations of TNCs in 2009 can largely be attributed to the organic growth of existing foreign affiliates.

The world market is becoming more and more integrated. Within last ten years world trade developed much faster than world production grew. Foreign employment remained practically unchanged in 2009 (+1.1 percent). This relative resilience might be explained by the fact that foreign sales started to pick up again in the latter half of 2009. In addition, many TNCs are thought to have slowed their downsizing programmes as economic activity rebounded – especially in developing Asia. In spite of the setback in 2008 and 2009, an estimated 80 million workers were employed in TNCs’ foreign affiliates in 2009, accounting for about 4 percent of the global workforce.

Dynamics vary across countries and sectors, but employment in foreign affiliates has been shifting from developed to developing countries over the past few years; the majority of foreign affiliates’ employment is now located in developing economies. The largest number of foreign-affiliate employees is now in China (with 16 million workers in 2008, accounting for some 20 percent of the world’s total employees in foreign affiliates). Employment in foreign affiliates in the United States, on the other hand, shrank by half a million between 2001 and 2008.

In addition, the share of foreign affiliates’ employment in manufacturing has declined in favor of services. In developed countries, employment in foreign affiliates in the manufacturing sector dropped sharply between 1999 and 2007, while in services it gained importance as a result of structural changes in the economies.

Foreign affiliates’ assets grew at a rate of 7,5 percent in 2009. The increase is largely attributable to the 15 percent rise in inward FDI stock due to a significant rebound on the global stock markets.

The regional shift in international production is also reflected in the TNC landscape. Although the composition of the world’s top 100 TNCs confirms that share has been slowly decreasing over the years. Developing and transition-economy TNCs now occupy seven positions among the top 100. And while more than 90 percent of all TNCs were headquartered in developed countries in the early 1990s, parent TNCs from developing transition economies accounted for more than a quarter of the 82,000 TNCs (28 percent) worldwide in 2008(2.1- table), a share that was still two percentage points higher than that in 2006, the year before the crisis. As a result, TNCs headquartered in developing and transition economies now account for nearly one tenth of the foreign sales and foreign assets of the top 5,000 TNCs in the world, compared to only 1-2 percent in 1995(2.1-picture).

Picture 2.1 - Number of TNCs from developed countries and from developing and transition economies, 1992, 2000 and 2008

Other sources point to an even larger presence of firms from developing and transition economies among the top global TNCs. The Financial Times, for instance, includes 124 companies from developing and transition economies in the top 500 largest firms in the world, and 18 in the top 100. Fortune ranks 85 companies from developing and transi­tion economies in the top 500 largest global corporations, and 15 in the top 100.

Table 2.1 - Foreign activities of the top 5,000 TNCs, by home region/country, 1995 and 2008

Over the past 20 years, TNCs from both developed and developing countries have expanded their activities abroad at a faster than at home. This has been sus­tained by new countries and industries opening up to FDI, greater economic cooperation, privatizations, improve­ments in transport and telecommunica­tions infrastructure, and the growing availability of financial resources for FDI, especially for cross-border M&As.

The internationalization of the largest TNCs worldwide, as measured by the transnationality index, actually grew during the crisis, rising by 1.0 percentage points to 63, as compared to 2007. The transnationality index of the top 100 non-financial TNCs from developing and transition economies, however, dropped in 2008. This is due to the fact that in spite of the rapid growth of their foreign ac­tivities, they experienced even faster growth in their home countries. Among both groups, this index varies by region: TNCs based in the EU, Africa, and South Asia are among the most transnationalized.