A Case Study of Burger King and Labor in the U.K.: Transnational Corporations and Labor

A Case Study of Burger King and Labor in the U.K.: Transnational Corporations and Labor

Part B: Critical Evaluations of Theories

This part will involve the theoretical approaches to understanding how transnational corporations (TNCs) grow based on the various economic perspectives. In particular, two theoretical positions will be explored. The first one will include the internalization theory that uses a combination of different economic perspectives such as international business theory, institutional economics, and neoclassical approaches to explain how TNCs grow and internalize due to transactional imperfections. The second theory for explaining the growth of TNCs is the transnational monopoly capitalism, which focuses on the strategies that firms use to increase their power, influence and control of the market, and sometimes even the government regulations. These two theoretical approaches will be discussed in detail concerning how firms grow internationally.

Internalization Theory

Foundations

The development of the theory is majorly based on the elements of transactional market failures that lead to the firm’s growth. Most of these transactional costs are analyzed based on the firm’s risk management. For a firm to grow internationally, the advantages of internalization are therefore applied to the international context. Most of the emphasis is on how the firms enhance production in the other countries and deal with licensing to operate in such areas. There are two main issues discussed where the less committed areas include the franchising and development of subsidiaries. However, there are also full intensive commitment approaches where the firms engage local suppliers, develop production plants in the host nations, and establish operations from that country, enhancing the TNC’s growth. Based on the knowledge from before and after world war III, most the corporations benefited from the intermediate products internalized before the war. The knowledge-based products after the world war increased the direct foreign production and globalization of the firms.

The early foundations of the theory could be traced back to the works of Coase (1937) and Williamson (1975). One of the foundations of the internalization theory was the organization of production. In the traditional neoclassical approach, the focus was on the firm’s cost types and revenues, and there was no evaluation of how those costs impacted the resource organization. Therefore, the contributions of Coase (1937) through the seminal paper in the year enhanced the economic attention to how the price mechanism in the market influences the allocation of resources in the firm and is dependent on the entrepreneur as the coordinator. Therefore, consumption also influences how a firm organizes its production, which bridges the gap in explaining how transnational companies organize production activities. In the seminal paper, Coase (1937, p.333) argued that the price movements outside the firm, which are based on the transactional exchanges in the market, impact the firm’s internal production organization by the entrepreneur, who is the coordinator and director of production such as the way resources are allocated by the price means.

Therefore, there has to be a balance between the costs of carrying out the transactions and the costs of organization and allocating resources internally and the importance of such costs being equal to the outside environment in comparison to that of competing firms organizing in the same way (Coase, 1937, p. 341). In this regard, the growth is explained in terms of the firm’s growth based on the costs and benefits analysis of the internal transactions that influence how resources are allocated internally as compared to the cost and benefit analysis of the external transaction costs and the resources allocated through the market. For a TNC to grow, the market imperfections of the transactional type have to exist. Coase (19370 indicated that there are two types of market imperfections which include structural and transactional. The structural imperfections refer to the way the market and industry in which the firm operates are structured, such as the market shares and powers other firms command. The second type of transactional imperfections entails the knowledge and asymmetry of information, especially between the sellers and buyers, including the costs arising from transactions such as legal costs of the contract stipulation.

Developments

One of the scholars that tried to advance the theory of internalization to Coase’s contributions was Oliver Williamson (1975). Williamson (1981, p. 1537) indicated the main premise of his approach to be the way modern corporations were looking for ways to economize the transactional costs through a series of innovations in the internal structure of the organizations. Williamson advanced the analysis of Coase by introducing concepts that detailed reasons and analysis of the benefits of internalizations which included bounded rationality, opportunistic behavior, and asset specificity. The bounded rationality included that people and institutions that refer to the corporations operate under the imperfect information due to constraints in the limits to the information they possess. This means that the cognitive imperfections arising from the knowledge owned by a firm or individual determine how a firm grows and benefits from the internalization advantages. In this case, the level and quality of the information are expected to be higher when the organization of production and operations are carried out within the firm than when externalized. Therefore this approach advocated for the firms to push for the investment in getting more asymmetric information within the firm’s operations to have leverage in an imperfect market.

The second advancement by Williamson is opportunistic behavior, which entails how external parties, employees, and managers may want to seek self-interest due to the asymmetry of information they have obtained. This is even likely to create more challenges to an organization’s growth if the small economic agents exist and operate independently. However, internal transactions protect most corporations from opportunistic behavior since the level of information is higher when operations are internalized. The last concept advanced by Williamson to develop the internalization theory includes asset specificity, which includes that firms should buy assets and accumulate skills that complement each other to increase returns than when used separately. In this case, it is important to increase the productivity of the consents by ensuring that people with the right skills use them for the purposes they were designed and acquired for, especially when used internally compared to other businesses. Williamson believed that this could result in higher efficiency and growth of the TNCs.

Peter Buckley and Mark Casson (1976) further advanced this economic model, especially from McManus’s analysis. In this case, McManus (1972, p. 72) indicated that it was important to ensure that the control function of firms should be internally centralized to increase income in various markets globally and optimize the profitable and productive activities in various regions. In this case, McManus argues that the costs of market transaction operations are the foundations for why most TNCs create subsidiaries in the foreign market that operate under the centralized control of the firms. Buckley and Casson (1976, p.33) developed these ideas by indicating that firms tend to focus on optimizing profits in imperfect markets and that the internalization of these markets beyond the national borders in which a country operates leads to the growth of multinational enterprises (MNEs). Further, the authors indicated that there are instances where firms tend to consolidate ownership and centralize control linking various markets when intermediate products become imperfect, and bypassing them bypasses the challenge of creating internal markets. In this case, the two most important internalization areas include the markets of the products that are intermediate, characterizing the period before WWI, and the search for knowledge markets that happened in the period after WWII. Some of the sources of the market imperfections identified by Buckley and Casson include long time lags between initiation and completion of production, discriminatory pricing, inequality in the buyer and seller position as it regards the knowledge of products, and government interventions in international markets such as restriction in the movement of capital goods, the Valorem tariffs, and discrepancies in taxation rates among others.

Criticism

One of the main criticisms was directed especially to the advancements by Buckley and Casson. One of the criticisms was by Kogut and Zander (1993), who argued that Buckley and Casson offered misleading conclusions on the knowledge as a product that can be packed and transferred at a cost. The authors believed knowledge was tacit and not easily codified; hence, it was hard to package and transfer to other institutions or firms, including social environments. In this case, firms are viewed as social institutions and communities that use their knowledge to innovate and create economically rewarded services and products. The efficiency of creating these outcomes determines the ability to transfer such knowledge. Besides, most of the developments do not explain how TNCs grow internationally through the internalization theory. In this case, authors such as David Teece (1986) criticize the theory of internalization as lacking the ability to predict TNC growth. In this case, the theory only gives opportunities for where companies can internalize and get leverage in the international market. However, it does not offer ways in which the firms and TNCs can achieve global expansion, making the theory incomplete, lacking justification, and lacking the ability to grow.

Transnational Monopoly Capitalism

Foundations

The theory originates from the works of Hobson when evaluating the imperialism in the West countries and analysis of the under-consumption in the society (Letto-Gillies, 2019). In this case, Hobson compared how the nations were interested in business interests such as collecting raw materials and gaining further control and political power. This includes the ability to influence other governments and regions where they were establishing colonies. In the same way, TNCs take the expansion into the foreign markets to increase their control and dominance by expanding their profitability and influence in the nations (Hobson 1902). This elaborates the Marxian viewpoints in that TNCs tend to expand into the global market to increase their profitability by lowering production costs. In return, the high revenues are used by the TNCs to have more power and ownership through market share, which is critical in market manipulation and establishment of the capitalist monopolies in the global markets. In the article by Sackrey et al. (2013), the authors indicate that capitalism enhances the stagnation of oligopolistic markets that balance the prince mechanisms and wages in the market. Instead, it allows monopolistic behaviors to dominate the market where all firms aim at maximizing profit. Establishing major monopolistic corporations edges out competition by eliminating price wars leading to economic surplus and disparity between various individuals and firms.

Developments

There was further development of the monopoly capitalism theory to explain the modern-day growth of the TNCs. The advancements were majorly by Cowling and Sudgen (1987), who argued that the growth of the TNCs was major due to the control concept (Letto-Gillies, 2019). In this case, most large firms operated as one entity that was large enough to manipulate the market by managing cooperation and rivalry. As a result, the TNCs inspired by the growth aimed to develop a substantial market power that could be used for creating monopolies that created influence over governments. This was, to the extent of, disallowing the Pareto efficiency.

Regarding the labor market and its impact on consumers, the TNCs have also demonstrated the ability and power to manipulate labor outcomes internationally (Cowling and Sudgen, 1998). Further, a study by Cowling and Tomlinson (2005) indicated that most TNCs use a divide and rule approach to disperse labor and reduce their power in organizing and demanding more from the organization. The second way the TNCs increase their power and controls is by influencing regulatory frameworks. This includes how the TNCs can influence the design and shape of the regulation implementation in a concept known as the regulatory capture (Cowling and Tomlinson, 2005). This allows the companies to maximize their profits and weaken consumer protective regulations. The third way is controlling innovation which can be stifled. The large TNCs tend to maintain the market by making strategic purchases and acquisitions of certain companies in the market, which could lead to stifling of innovation and controlling the market direction to benefit the TNCs and maintain a monopoly in the global market.

Criticism

The main criticism is that despite developing much support on how the TNCs behave to promote control of power and advancement of their interests, there is too much evaluation of the political influences, especially on regulatory frameworks and how they develop and use the control power for their growth internationally. However, despite being monopolies, the growth of the TNCs and monopolies have substantially also contributed to the growth of local economies through employment provision and the development of infrastructure. To an extent, some of the knowledge is transferred to the employees in the local regions where other companies and small enterprises become innovative and compete pretty in specific market solutions. Therefore, the proponents of the monopoly capitalism approach to explaining the TNC’s growth across transnational borders underestimate this aspect.

Part C: Burger King and Labor Impact in the U.K.

In this part, the main aim is to explore how the Burger King Company entered the U.K. market, its expansion over the years and how it has impacted the labor sector in the country. The company is one of the most profitable fast-food companies across the global market, which many branches in major cities globally. In the U.K., the company is one of the major fast-food companies that have expanded. This has led to direct, and indirect employment effects, improved living standards through fair compensation and wages, and promoted other factors such as job stability and employee and employee welfare.

Burger King entered the U.K. market in 1974. However, its early operations were difficult to expand until its acquisition by the Grand Metropolitan in 1989. This was further followed by purchasing the Wimpy Hamburger chain and converting the outlets to Burger King Fascia. Another major boost in 1996 was the conversion of the Little Chef branches in the major roadside of U.K. cities to Burger King by Granada. By 1994, Burger King had established more than 250 restaurants across Britain. By 1997, the company had opened up to 465 outlets and owned about 15% of the British burger market share by 1999. In 2017, the company was acquired by Bridgeton and Caspian Group and increased the outlets to 530 in the U.K. alone b 2021. This has boosted its outlook with intentions to list in the London Stock Exchange market, where the value is estimated to be 600 million Euros. Based on these statistics, Burger King is a major employer across Europe as fast food restaurants are the main food source, especially in cities. Therefore, it has impacted the labor market in the U.K. intensively.

Firstly, the company has impacted the U.K. labor force both directly and indirectly. Regarding direct employment, the outlets require physical staff, both technical and not technical, and the managers and supervisors of the outlets and franchise. The 530 outlets have employed about 16500 staff from the U.K. alone working in various capacities. However, considering the recent pandemic of Covid 19, there have been difficulties re-opening some of the closed outlets due to losses. This can permanently close down about 10% of its outlets, which means about 800 to 1600 employees would lose their jobs. Considering these employees depend on the company for salaries and wages to sustain their families and themselves, such closures and expansions have quite promoted the ability of the employees to increase their savings, purchase power, and improved living standards that promote the U.K. economy. Besides, the company has also promoted indirect employment. This is through the engagement with local suppliers, which has provided consistent client relationships and sustained such supply business for the raw materials used by the burger king. As a result, the supplying companies also employ more individuals to meet the demand of the Burger King Restaurant outlets across the U.K., which enhances even more income. Some of the people benefiting are those using the company through franchise arrangement, hence creating extra income as entrepreneurs and providing more employment opportunities to other people in the U.K.

Considering it is one of the large employers in the U.K., Burger King has been a leader in providing competitive compensation packages to its employees, contributing to the improvement of the living standards. The workers can save more and spend more, including on leisure activities. The dependents can also benefit from the improved living standards due to decent wages. Besides, it has also become a corporate leader in championing employee welfare with incentives such as paid leaves and maternity/paternity leaves. This includes having good safety and health of workers policies that ensure that each employee is not exposed to unnecessary risks in the workplace. This is critical as it increases the motivation of the workers and commitment to the organizational success as well. Lastly, some of the employees benefit from job stability as some are offered permanent employment status that secures their job security over a long period. In this case, people can plan better, including how to plan for housing and mortgage, purchasing means of transport, and other investment plans aimed at improving their livelihood in the end. 

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