Unit Nine: Multinational Corporations

Dr. Russell Williams

Required Reading: Cohn, Ch. 9.

Class Discussion Readings: Debora Spar and David Yoffie, “Multinational Enterprises and the

Prospects for Justice,” Journal of International Affairs, Vol 52, Issue 2, (Spring 1999), pp. 557-582.

Stephen McBride, “Reconfiguring Sovereignty: NAFTA Chapter 11 Dispute Settlement Procedures and the Issue of Public-Private Authority,” Canadian Journal of Political Science, Vol. 39(4) (2006), pp. 755-775.

Outline:1. Introduction 2. The Origins of MNCs 3. MNCs vs. States?4. Contemporary Policy Challenges5. The Politics of MNC Regulation6. Conclusions7. Further Reading8. For Next Time . . .

1) Introduction:

What are “Multinational Corporations”?

=Firms that “actively” control operations in 2+ countries

=Direct control over foreign affiliates/subsidiaries

E.g. “Foreign Direct Investment (FDI)” vs. Portfolio Investment

Examples?

World’s largest publicly traded company (?)

Home: = Texas

Oil reserves = 72 Billion barrels . . . .

Operations = 44 refineries in 20 countries (Approx)

Subsidiaries = Exxon, Mobil, Esso, several major shipping lines . . .

Employees = 110,000 (Approx)

Sales = $417 Billion USD (1st Quarter - 2011)

Politics?????

1) Introduction:

Why are we interested in “Multinational Corporations”?

=Key site of tension between national political systems (states) and a transnational economy

Under-analyzed . . . .1. Spectacular growth and spread of operations in

developing economies (see handout)

2. Can MNCs be regulated given their “mobility”?

Theoretical Perspectives:

Liberals: MNCs organize global economic efficiency

Technological improvements . . . Move capital to where it is “needed” . . .

“Orthodox” or Neoliberals tend to downplay MNCs per se . . . Focus on markets rather then corporate structures

E.g. Many question the relevance of corporate nationality (Kenichi Ohmae and others)

International economic cooperation should aim to help spread of MNC operations

Theoretical Perspectives: Realists:

MNCs often seen as agents of “home countries” E.g. Susan Strange – operations benefit the economy and power

of the state they are based in =Bad for “host countries”

Historical Structuralist and critical perspectives? “Dependency Theory”: MNCs manage

underdevelopment E.g. locate key production irrespective of economic justice or

market fundamentals “Gramsicain Theory”: MNCs are basis of

transnational capitalist hegemony International economic cooperation will probably help

MNCs but not the betterment of global society

2) The Origins of MNCs: Rapid growth of MNCs has both microeconomic and political

explanations . . . .

a) Firm specific motivations “Vertical Integration” = stable supply chains/factor price differentials “Horizontal Integration” = “economies of scale” Technological change = improved ability to control operations in

other countries

b) “Environmental” or “structural” motivations: Global economic growth Liberalized financial markets Security of investment and support from dominant states = politics

E.g. Reduced risk of nationalization and expropriation by “host” states Liberal trade barriers = politics

3) MNC’s vs. States:

IPE tends to focus on questions relating to the growing power of MNCs relative to states . . .

MNCs and their “Home Countries”: Most large MNC’s based in a few countries MNCs and external FDI seen to have few negatives –

outside of the outsourcing debate E.g. supply of new resources, repatriated profits etc.

=States actively promote and protect the interests of “their” MNCs

MNCs and their “Home Countries”:

However . . .

Growing “Home Country” concern about MNC “outsourcing”

MNC’s always moved production to other jurisdictions, but outsourcing is more concerning . . . .

Concern over political/national security problems – MNCs have ability to undermine states’ foreign policy goals

E.g. Toshiba and Soviet Submarines E.g. Digital media and data control

MNCs and “Host Countries”:Benefits:

Greenfield investment – Host countries are “capital poor”

Integration into global supply chains Technology transfer

Risks: Profits – Does FDI reverse capital poor problem?

Or, Investment – local “crowding out” effect which limits

other local development

Disorganization of local supply chains(?) Quality of employment(?)

MNCs and “Host Countries”:

Research suggests host countries are politically weak relative to MNCs:

E.g. “Greenfield Investment” - See handout, Table B . . .=states subsidize MNC investment in competition to attract FDI

Depends on number of investors and number of suppliers E.g. Scarce natural resources may generate different relations . .

Depends on nature of investment E.g. “Obsolescing Bargain”: MNCs have power initially, but as

their investment becomes fixed . . . their bargaining power decreases

Capital intensive industries . . . Exactly the kind of facilities MNCs have been slow to build in developing countries

Question – Does the Home/Host distinction still matter????

Liberals: Globalization and the borderless world mean that corporations all have same rational interests

= home country MNCs shouldn’t act differently . . .

Realists: Home country MNCs still have allegiance to powerful states

Pattern of investment suggests “command and control” functions stay in high cost jurisdictions (?)

MNCs still exhibit distinct “national characters” and orientations to global capitalism (Pauley and Reich)

=Benefits continue to flow to home countries

Historical Stucturalists: Many influenced by ideas of dependency theory see development of

own MNCs as vital to development

Question is really about whether “home countries” can strike better bargains with MNCs . . .

4) Modern Policy Challenges of MNCs:

a) Ogopolisitic economic sectors and trade theory (?) Production decisions not driven by comparative advantage

Extreme view: Traditional development strategies irrelevant (?) Cautious view: Lingering fears of political instability, nationalization etc.

keep capital intensive industry investment in North

b) Intrafirm Trade – the problem of “Transfer Prices” Principle of “separate national accounts” creates potential for tax

avoidance and evasion E.g. Offshore Tax Havens

Impact on national tax revenues?

c) Structural power – locational bargaining and the “Race to the Bottom” Environmental standards Labour standards

5) The Politics of MNC Regulation:

Attempts to regulate MNCs

North initially had no interest in global regulation Home countries sought:

“Bilateral Investment Treaties (BITs)” Bilateral Tax Treaties

=both supported MNC activity Host countries saw inward FDI as key to growth . . .

Result = Regulatory efforts benefited MNC development and did little to address policy challenges

South? Often have seen MNCs as “hurting” development, but in

a weak position politically

Attempts to regulate MNCs

Southern “war” with MNCs (1970-1982):a) Unilateral domestic actions

E.g. Expropriations and nationalizations of MNC assets (See handout table C)

b) Widespread demands for international regulation of MNC activities:

UN Commission on Transnational Corporations & Centre on Transnational Corporations (1974)

=Develop “codes of conduct” for MNCs 1982 draft provisions had rules designed to combat

tax evasion, transfer pricing and global competition . . . . but . . . .

Attempts to regulate MNCs

1980’s – present - Dominated by efforts to regulate FOR MNCs . . . . Why?

Political influence of MNCs – want their problems addressed Demands of US in trade and investment regimes Political weakness of southern “host countries” – FDI was seen

as only viable option for development = fighting MNCs was counterproductive

OECD/WTO/RTAs have all attempted to entrench MNC FDI rights at expense of state power and sovereignty

Trade regime – “Investors’ Rights” Provisions: WTO: National Treatment and GATS WTO: TRIMs WTO: TRIPs NAFTA: Chapter 11

Attempts to regulate MNCs

OECD and an “FDI Regime”: E.g. Multilateral Agreement on Investment (MAI):

National Treatment and MFN applied to all investment activities

FDI restrictions to be removed in key sectors (culture, banking, transportation, healthcare)

Ban on “performance requirements” Investor to state dispute resolution (E.g. NAFTA Chapter

11) Failed amidst considerable controversy(!)

Developing nations not invited to negotiations Growing “anti-globalization” movement

Current initiatives? WTO Doha Round?

US wants “investors’ rights agenda” EU wants WTO competition policy”

6) Conclusions:

MNCs remain a source of political controversy . . .

Widespread demands for “regulation” However, international cooperation tends to

focus more on protecting MNCs from states Thought to be economically desirable (?) Mirrors public ambivalence (?)

What does this suggest about modern IPE?

What does it suggest about states and state power as the central analytical concerns of International Relations?

Further Reading:On MNCs:

Louis W. Pauly and Simon Reich, “National Structures and Multinational Corporate Behavior: Enduring Differences in the Age of Globalization,” International Organization, 51-1 (Winter 1997), pp. 1-30.

Thomas C. Lawton and Kevin P. Michaels, “The Evolving Global Production Structure: Implications for International Political Economy,” in Thomas C. Lawton, James N. Rosenau, and Amy C. Verdun, eds., Strange Power: Shaping the Parameters of International Relations and International Political Economy, Ashgate, 2001, pp. 57-74.

Mark Herkenrath and Volker Bornschier, “Transnational Corporations in World Development – Still the Same Harmful Effects in An Increasingly Globalized World Economy?,” Journal of World-Systems Research, 9-1 (Winter 2003), pp. 105-139.

On political struggle over MNC regulation: Andrew Walter, “NGOs, Business, and International Investment: The

Multilateral Agreement on Investment, Seattle, and Beyond,” Global Governance, 7-1 (January-March, 2001), pp. 51-73.

On policy challenges: Sumner J. La Croix and Denise Eby Konan, “Intellectual Property Rights in

China: The Changing Political Economy of Chinese-American Interests,” World Economy, 25-6 (June 2002), pp. 759-788.

Trish Kelly, “The WTO, the Environment and Health and Safety Standards,” World Economy, 27-2 (February 2004), pp. 131-151.

For Next Time:

Unit Ten: Development and Underdevelopment Etc.

Required Reading: Cohn, Ch. 10.

Class Discussion Reading: Robert Hunter Wade, “What Strategies are Viable for

Developing Countries Today? The World Trade Organization and the Shrinking of Development Space,” Review of International Political Economy, 10-4 (November 2003), pp. 621-644.

Shaun Breslin, “The ‘China model’ and the global crisis: from Friedrich List to a Chinese mode of Governance?” International Affairs, 87:6 (2011), Pp. 1323-1343.