States and Firms - Portland State...

States and FirmsWho’s regulating whom?

Wednesday, November 17, 2010

General ConsiderationsAlmost always a multi-level scenario

Exception is security or strategic sector-- sometimesRequires considerations of home-state and host-state relationshipRequires consideration of home-state and firm relationshipHost-state and International Organization considerationsRequires consideration of host-state firm relationship

domestic interest group (workers) firm relationshipcapacity of host-state

Firm structure and position in global markets


Home-State, Host-State Relationship

Do the states have a strategic relationship?

Are they allies or antagonistic?

If they are allies it provides some flexibility for the host state.

If there is conflict with Firm, does it challenge a systemic goal for home state

If antagonistic it can either foreclose market entry for firms, or firms can be used as leverage by states.


Host-State characteristicsIdeology or beliefs of ruling elitesRegulatory capacity of government

what ability do they have to monitor firms, enforce contracts, create competing organizations?What is domestic expertise in area, does it match state of the art?

Size of domestic market, or market access (membership in trade blocs etc)Market uncertainty, and failed domestic services

favor multinational firm that can keep contracts, exchanges, technology inside the firm.

Economic and political situation in host state.Host states’ budgetary position


Nature of the Firm

The bargaining position and relationship to the home and host state are often interacted with the nature of the firm.

What is the internationally competitive environment for the firm?

Why is it a transnational, or multi-national organization instead of simply trading?

The different reasons for multi-national organization provide varied points of leverage for the state against the firm, or pressures to convergence against the state.


Theories of the Firm

Neo-classical economics had some problems explaining the existence of large private organizations- the firm

Firm arises in response to particular market failures, or to capture specific rents.

Theories based in managing the costs of transactions: especially information, exchange contracts, labor.



Markets or Hierarchies

Hierarchies (firms) emerge where markets fail

Manage (internalize) risks and contingencies when making frequent and repetitive contracts with, high risk, high uncertainty, and or high costs of information.

Assume actors in marketplace are self-interested not benign. Bringing exchanges into the firm controls risks of deception, aligns interests of actors with special skills, knowledge or access.



Continuum of Exchange

Markets:•low information costs•easy contracts•low risk•transparent pricing•low barriers to entry•little return to specialized knowledge.

Hierarchies:•high information costs•frequent, repetitive contracts•high risk processes•opaque or unstable pricing•high barriers to entry•high return to specialized knowledge.•need to manage specialized human resources•specialized production or efficient human resource management



Neither Markets nor Hierarchies

Organizations also emerge where markets fail, or are less advantageous than alternative forms of organizing exchanges

May mange costs and communication using social structure, non-market, non-hierarchical relationships

Can emerge frequently, but not solely in “strong society- weak state” situations (like many developing countries.)

Think It’s a Wonderful Life.


Neither Market nor HierarchySocial and structural milieu is important for production and exchange relationships.

Firms may use family ties, cross-management, informal relationships, and reciprocity (for long-term exchange relationships.)

Can greatly improve efficiency and reduce information and transactions costs.

Also, norms of reciprocity allow for principal-agent problems (fraud, or advancement of personal vs. organizational interests)



Markets:•low information costs•easy contracts•low risk•transparent pricing•low barriers to entry•little return to specialized knowledge.

Hierarchies:•high information costs•frequent, repetitive contracts•high risk processes•opaque or unstable pricing•high barriers to entry

Neither market nor hierarchy:•Network organizations•dense social network, cultural norms•reduced information costs, importance of reputation•costly formal contracts, uncertain enforcement

•reduces transaction/contract costs•susceptible to individual-firm p-a problem•Multiple iterations limited partners allow reciprocity


Reasons for MNC Organizations

If conditions of perfect markets actually existed, much activity subsumed into firm would take place as arms-length transactions

Firms offer organizational advantages, such as, coordinating supply of inputs, communication within firm, reliable contracts, etc...

Multi-national firm structure can overcome market failures caused by poor contract enforcement, lack of infrastructure or other absent semi-public goods.

multi-national firm structure allows firms to gain information advantages, access finance internationally, achieve economies of scale production.

Distributing risk, geographical, and by sector


Nature of the Firm: Reasons for FDIOwnership advantages:technology, processes, innovation, economies of scale, intra-firm trade etc. transfers.

Location advantages (country-specific):Economic: Factor advantage,transport or communication costs, size of domestic markets, exchange rate uncertaintyPolitical Factors: Policies like taxation, market access, other forms of discriminatory treatment, protection of market shareSocial Factors: Differences in tastes, distances between market and production, attitudes toward foreigners, country-specific/market specific information

Internalization advantages:Markets missing, low or no contract enforcement, little intellectual property protection, protection of information.Wednesday, November 17, 2010

MNC- Horizontal Multi-Plant, Both Market Entry and Distributed Manufacturing

Home State HeadquartersManagement, Marketing, Finance, R & D

Host State Site-Market Entry

Manufacturing, Local Tastes, Contract Enforcement, Policy Barriers, Economic Risk

Host State SiteManufacturing, Contract

Enforcement


Enforcement


Enforcement


MNC- Horizontal Multi-location, Diversification

Home State HeadquartersManagement, Marketing, Finance, R & D





Host State Site-Market EntryDifferent industry: Manufacturing, Local Tastes, Contract

Enforcement, Policy Barriers, Economic Risk


MNC: Vertical OrganizationHome State

Management, steady flow of inputs for high volume manufacturing and specialty products

Host StateRaw materials mining, intermediate processing, harvesting, investment in infrastructure, high

fixed-costs, sensitive to nationalization or changes in market.

Host StateRaw materials mining, intermediate processing, harvesting, investment in infrastructure, high

fixed-costs, sensitive to nationalization or changes in market.


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Power: What is it?

The ability to make others do something other than their first preference

Manifest in use of persuasion, inducements, sanctions, and force.

Power is fungible, that is through use of linkages, can be transformed between forms- Economic power to military power, or trade into influence etc…


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Measure powerCorrelates of war project uses broad variety of data

Military expendituresMilitary personnelIron and steel production (industrial capacity)Urban and total populations

Relative Political CapacityVietnam showed problem with COW style measuresBased on ability of government to tax wealth- an indicator of

reach of government. Deflates countries whose taxes primarily at the border.

RPC has its own problemsWednesday, November 17, 2010

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Power- Recharge

Already know

Power is ability to get other’s to do what you want, and that they didn’t want already to do.

Power is exhibited is several forms

Persuasion

Inducements


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Power

Use of Power can only be identified if parties interacting differ in their initial preferences for actions.

If different groups have same preferences- there is no need to change behaviors.

If one actor changes behavior independent of threats, persuasion or inducements- Power was not exercised.


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Power, in its application is relational- that is it is often measured relative to other actors.

Great wealth on a desert island is useless, as is a strong army- if there is no opposition, or no will to use it.

Power is also a function of ability and willingness to use resources to the end of changing behavior.


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Power as PersuasionPersuasion:

Pointing out advantages of changing behavior- reframing issues in a better light, pointing out unconsidered costs etc.

Appeals to sentiment, shared history, principles, diffuse reciprocity.

Point out to rewards or punishments toward behavior.

Advantages of Persuasion-

Cheap, talk doesn’t consume much in the way of resources, or offend other actors.


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Persuasion and PerspectivesRealist and Neo-realists view talk as cheap.

Role of persuasion is to point out power relationships, or ease security concerns.

Talk can’t be trusted as much as structural dynamics.

Neo-liberal, functionalists, constructivists.

Shared norms and interests make persuasion very effective tool of IR.

Knowledge is power, and persuasion shares knowledge.Wednesday, November 17, 2010

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Inducements: RewardsCarrot and stick approach

Rewards can take almost any formRewards and punishments are linkages between areas, they spread bargaining games, or

change payoffs.Financial assistance, trade relationships, technical assistance, information sharing, promise

not publicize embarrassing information.Example, Mexico bailout after 1995 crisis.Foreign aid largely used to induce concessions rather than relieve misery.

Benefits: allows actors to “change” minds by changing preferencesPuts others in domain of gains, makes them grateful and less likely to challenge. Builds

reciprocity.

Costs:Potential burden to domestic sectorsMay reward defection.


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Inducements: PunishmentPunishments are an escalation over rewards.

Punishment is perceived as much more coercive, generate ill-will.

Forms:Embargoes, support of domestic opposition, disrupt trade, targeted sanctions (E.U. targeted

Florida, mid-western swing states in response to U.S. steel tariffs.)

Costs:Generally, effective punishments (non-military) require relationship with other states. If

sanctions disrupt trade- they also affect domestic groups.

Example- ILSAWednesday, November 17, 2010

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Punishment: Anticipatory Punishments threatened or carried out.

Credible threats rest on past actionsExample- U.S. response to 1956 Suez crisis.

Subsequent behavior by Israel from anticipation of punishment for secret invasion.

Punishment threatened against France and Britain- sell pounds sterling.

Bluffs called reduce effectiveness of future threats and decrease anticipation effect.

Costs of punishment:Engenders resentment.

France withdrew from NATO role, maintained independent military capabilities.


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Power and ForceRaw coercion

Earlier example used non-military forms of power, persuasion and inducements, those forms can stem from relationships, wealth, capabilities and international reputation.

Force uses warmaking.Can be one-sided.

Force does not induce the changing of other actors decisions, it compels them.

Is different than Punishments because it addresses present behavior not future behavior.

Would be if we invaded Sinai in ‘56Wednesday, November 17, 2010

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Force-Should only be used when objectives are irresolvable.

U.S. desire to remove Saddam.

Drawbacks:

Very costly. Disrupts economy (opportunity costs) of both sides, loss of life, losing leaders often lose position. Idea that war is good for economy is fiction.

Loss of reputation, ability to use persuasion- heightens security dilemma of other states, can trigger arms race.


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Fungibility of PowerPower takes many shapes, and different forms of power can effect other

arenas.

Power can be domain specificPope has strong moral power, cannot convert it into force- but contributed to the collapse of

Soviet Empire.

Japan and E.U. powerful in trade and influence (persuasion) but self-limited in military. Both possess ability to develop military capacity in months.

Ability to use power can be constrained by domestic factors.U.S. efforts to reform China’s human rights behavior. China ignored U.S., and still gained

MFN under Clinton, and WTO under Bush Jr.


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Fungibility of PowerEconomic assets most fungible

Convertible to military, diplomatic etc…

Political Skill: diplomats skilled at promoting policy through persuasion. Adept at different policy realms.

Military Power: Still fungible (Art), use, threat and presence structure calculations of states.

Military power enables other assets of power- to some extent.


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Measuring Power

COW data shows composite capabilities index;

Relative index of production.

World shares: Iron and steel production, fuels consumption in BTUs, population, active military, military spending

Assumes equal mobilization capability, salience, no projection gradient.


Value-Added Chains: Analyzing Production flows

Analyzing Value-Added chains, permits following a product, not just looking at firms

Value Chains external to the firm imply arms-length or semi-arms length contracts.

Imply that at least some market failures like contract enforcement, communications, basic infrastructure have been solved.

Value-added chains make the pressures towards convergence even more acute.

imply that some stages of production are factor-driven (labor) and that location of production and markets may be a less significant factor in decision-making.

Having production external to the firm, lowers firms’ exposure to political risk, may weaken state’s bargaining position as competition between manufacturing states becomes more salient.


State Capacity

Power

Institutional capacity to pursue policy

Measured vis-e-vis other actors, states, firms, interest groups

Some measure of independence as an agent/actor

Situational Capacity vs. Capacity and Autonomy


State Power

Economy Size

Economy Structure

Population

State institutional capacity

Influence

Military?


State Power-- Domestic

Composition of interest groups

Nature of production, geographical, market or footloose factor

Institutional capacity of the state

Administrative capacity

regulatory resources and ability

Barriers to trade and capital


State Power

Administrative Branch

Exporters

Export CompAgriculture FIRE ServiceLabor

Legislative structure

Foreign GovIGOs

Foreign Invst


State Power: DomesticAdministrative Capacity

Resources in Regulation monitoring researchLegal system, laws, resources

Political/Legal structureAdministrative Capacity local structure

Diversity of economic baseDiversity of firms in economyDivisions in class structure/interests

Economic activityState Owned Enterprises: create competition to oligopoly


State Power Domestic

Measuring/ Estimating State Power

Rich description (comparative)

Functional/structural comparative

Ability of state to raise revenues.

Taxes VAT, income, tariff, and SOE profits.


Evans et al.Embeddedness and Autonomy

Embeddedness: How linked into economic sector is government? knowledge, relationships, regulation, research, lending/financing etc...Autonomy: Is the government able to identify problems and policy solutions; execute policy without capture by interested actors.

Is the government able to identify a public interest, and then pursue it?


Autonomy and Embeddedness

Why are both of these important?


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Relative Political Capacity

Organski, Kugler, Arbetmann et. al.Accounts for different mobilization capacities.

Estimates RPC by Estimates national tax extraction relative to average of

similarly developed countries.Penalizes resource extraction income, and tariffs


Relative Political Capacity

Attempts to estimate reach of governments into society in a comparable fashion.Is a ratio of the observed tax extraction over extraction predicted by a regression model.

Essentially the error term of a predictive regression for tax-extraction.

Regression model= tax extraction (revenue ex. soc sec)= Agri/GDP + Manu/Gdp + mining/Oil +GDP/Percap+ Educ_spend


RPC: Problems

Problems:Doesn’t account for discretionary low tax rates.Is subject to change rapidly based on national policy- subject

to change for projections.Difficulty comparing countries at different levels of

development.


RPC

Is there a difference between capacity and political will

If a country won’t extract taxes, is that different than one that cannot?

Greece. Our estimate of expected revenues shows Greece off by €31 billion in revenues compared to its neighbors in the E.U. in 2007.


RPC: World EstimatesRPC as extraction + reach (unemployment as predicted variable)


RPC: Europe, slightly tweaked


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Salience: How much does it matter?

If an action is not paramount in national interest- I.e. survival of the state not dependent. How much willingness to sacrifice life and treasure?

If salience (importance) is high- greater fraction of resources will be brought to bear.

Role of International institutions on reducing salience for defectors increasing it, or dispersing it among cooperators. Iraq again.

Willingness of home state or host state to use resources.Wednesday, November 17, 2010

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