MNCs #8 1
Multinational corporations (MNCs)
By Paul Alexander Haslam Negative view of them, but some support local communities and econo. dev. = polarizing - Goal of the text: present a balanced picture of MNCs MNCs are drives of globalization WHAT IS A MULTINATIONAL CORPORATION? (P. 45) Different terminologies: - Multinational corporations: MNCs = used in social science - Transnational corporations: TNCs = UN system - Multinational enterprise: MNE = international business studies - Foreign direct investment : FDI = economists - Direct investment = physical presence (buildings, techno, labour), more stable - Indirect invest. = foreign portfolio invest. (hot capital flows) (purchase of debt, loans, stock marjet) Definition of MNC An enterprise that engages in FDI and owns or controls value-adding activities in more than one country 2 distinctive features: 1. coordinates value-adding activities across national borders 2. internalizes the cross-border transfer inputs used in the production process ( market) Variation of size and internationalization Top 100 MNCs = concentrated, growing faster than the others, most from the developed countries FDI Developing countries received les FDI than developed ones FDI = most important source of new money for developing countries FDI is concentrated in 5 dynamic and industrialized developing countries (Brazil, China, Hong Kong, Mexico and Singapore) o But FDI figures dont indicate new productive investments vs Mergers and acquisition (transfer of $ to buy a local company) o Foreign invest. figures may include domestic invest. o So, these figures may be misleading (impact of FDI on development) WHAT MOTIVATES MULTINATIONALS TO GO ABROAD? (p. 47) 3 approaches 1- A critical approach inspired by Marxism 2- The mercantile or nationalist approach 3- The liberal or international business approach
#8 MNCs 2
1- Dependency and critical approach MNCs = representatives of the global capitalist system = negative for developing countries Dependency theory: MNCs have a role in maintaining underdevelopment o Prebisch: trade-based explanation o Marxism: role of MNCs in organizing this trade relationship o Baran: Intl division of labour (IDL): high-value manufacturing = core, commodity and resource extraction = periphery underdev. $ send back North. New IDL (NIDL): MNCs manufacturing in 3nd world because of low-cost labour, high-value-added manufacturing in developed countries MNCs + local elites to defend the existing social order Impacts: change how countries (elites) see their interests. Autonomous local dev. is impossible Industrialization for external agents = choice that are dysfunctional for local dev. Associated dependent development (Cardoso and Faletto) o Dev. and industrialization possible under the aegis of MNCs o Triple alliances (Evans): State creates state-owned firms and joint ventures involving MNCs + local firms Dev. limit (production of upper-class consumption) = elistist 2- The mercantile approach and the national interest MNCs = representatives of political and economic interests of home countries Era of MNCs correspond to US hegemony (but Japan also, national champions) Us firms expansion (ex: oil) because: o To establish safe supply of natural resources o To supply cheap petroleum to fund its political-military western alliance (Cold War) o To create a world-wide liberal and business-friendly culture o To improve its balance-of-payments o To fund its military spending by means of repatriated profits o Other goals during Cold War (foreign policy objectives) Still ties between MNCs and home countries Countries build national champions, subsidizes MNCs guarantee supplies of needed raw materials for resource poor countries 3- International business perspective MN Cs = differentiated actors with diverse strategies ( homogenous) OLI paragdim (Duming). 2 questions:
#8 MNCs 3 1. Is there a common nature of feature of MN that distinguishes it from other firms? 2. What explains the myriad forms of internationalization chosen by MNs? o O: Ownership advantages = elements unique to the firms (patents, processes, management, access, etc.) o L: location-specific advantage = factors (poli. Social. Econo.) in a country that work with the firms other advantages o I: Internationalization advantage = advantages of co-ordinating production within the hierarchical governance structure of the firm ( market) o Intl markets = imperfections o Inside MNC = lower transaction costs o Market = competitors may copy ownership advantages o Existence of MNCs prove that free-market = imperfect and inefficient!! 4 different strategies when MNCs go abroad 1. Resource seeking strategy : MNCs need ressources that are only available abroad 2. Market-seeking strategy : MNCs want to serve the consumer demand of a market directly instead of by trade. 3. Efficiency (or cost-reducing)-seeking strategy : MNCs want to increase the efficient of their operations through exploiting differences in tha availability and cost of labour, capital and ressources. 4. Strategic asset-seeking strategy : MNCs buy up assets of other corporations as part of a global strategy to improve their competitiveness
RELATIONSHIP BETWEEN STATES AND MULTINATIONALS (p. 49) A crucial part of the impact of MNCs on development is how governments mediate this relationship Obsolescing bargainning model Firm and state power varies by country, firm, sector of activiy and conjuncture. Each actor (state and firm) wants to capture a greater share of benefits of the foreign investment The outcome of this bargaining is affected by their realtive bargainning power, strategy and constraints. Firms hold the upper hand when they first invest because governments try to outcompete other potential lacations by offering attractive conditions The bargainning power begins to shift towards the government once the investment is sunk because the company cannot easily leave o Then, the state may change the rule of the game and try to extract more benefits o Example of the power of the state : US-owned copper mines in Chile (nationalisation)
#8 MNCs 4 o Counter-example : manufacturing companies (footloose investment : (firms can easily move elsewhere if regulation because of low level of start-up investment) MNCs are able to limit obsolescence o By structuring their financing to include home country and intl financial institutions o By developping political cover through close relations with prominent local political and economic actors o By encouraging home gov. To promote intln investments protection through bilateral agreements anda t the WTO 90s : Is the obsolecescing model bargaining relevant? o States now want to attract MNCs and do very little to bargain once they are establish o Cooperation btw the state and the firms o Some authors said state-frim bargaining = counterproductive o The gratest spillovers on the local economy occur when the MNC is the most free (= no regulation) 21 century : more state regulation of MNCs o Success of South-Asia = need a close and supportive working relationship between foreign and domestic firms and governments
INTERNATIONAL REGULATION OF MNCs (p. 50) International agreements limit the range of policy choices apen to governement in their realtionship with MNCs. o 60s-70s : developping country asked for change in the world trade regime (fairer) = controls on the activities of MNCs. o Counter-offensive of the rich country to protect the rights of foreign investors 1. Campaign to sign bilateral investment protection agreements o Bilateral investment treaties (BITs) btw developped and developping countries that enunciated principles of treatment that foreign investors were entitled to received from host gov. o Equitable treatment, full protection and security (from expropriation) and the right to sue the host gov. for breach of obligations 2. Investment issues were included in the GATT negociations o Trade agreements that include protection of foreign investors o Uruguay Round (1994) TRIPS (Trade-Related aspects of the Intellectual Property Rights) TRIMS (Trade-Related Investment Measures) o Forbid performance requirements (developmental obligation) Free trade agreements that included invest. disciplines
#8 MNCs 5 o Doha Development Round (2001) had investment on the agenda, but dropped it in 2005 because of the opposition of developing countries Legalization of the rights of foreign investors = MNCs protection from gov. and civil society 3. Corporate social responsibility was promoted vs state regulation CORPORATE SOCIAL RESPONSIBILITY (p. 51) A way of forestalling calls for gov. regulation CSR = MNCs have a responsibility beyond their shareholders to a broader set of stakeholders (groups that are affected by the activity of the firm) CSR is a voluntary commitment o Moral argument : MNCs should behave ethically o of operational risk, workers commitment, efficiency, profit While rights of MNCs have been enhanced through intl law, MNCs responsibility remains voluntary Guidelines for Multinational Enterprise (1976) = most significant corporate social responsibility effort by developed countries Code: The Global Compact (UN) o But there is no independent audit or verification of company efforts Most MNCs have their own code of conduct - Is CSR appropriate for developing world? Created in developed countries, where there is a strong legal and social framework Not the case in developing countries Is voluntary efficient? No evidence of the impact of CSR on dev. MNCs, POVERTY AND DEVELOPMENT (p. 51) Are MNCs good or bad for dev.? Difficult to answer because FDI is heterogeneous and the policy regime and bargaining outcomes vary greatly among states For FDI to be beneficial, it must meet 5 conditions: 1. The capital account: FDI inflows must be than outflow to the MNC home office Significant capital inflows during establishment phase, then 2 choices: re-invest profits locally or repatriate them to the home country Economic or political instability = risk of repatriation (countries that are the most in need of the developmental push of FDI (poorest and least stable) are the least likely to benefit) 2. The current account: The sum total of trade generated by the MNC must result in a greater value of export than import to be beneficial Difficult to know because of intra-firm trade Investment is often import-intensive because of high-quality machinery
#8 MNCs 6 Market-seeking strategy = import-intensive Resource-seeking and efficiency-seeking = trade surplus 3. Government revenue: MNCs should generate more gov. revenue than paid out in incentives Gov. provides incentives (tax holiday, subsidies, infrastructure, etc) to encourage MNCs to invest, re-invest and stay MNCs seek to reduce their tax burden Gov. give incentives and tax deductions to attract = gov. revenue for social welfare spending 4. Spillovers and poverty reduction: Do MNCs crowd in or crowd out local firms? (do MNCs develop beneficial links with local suppliers?) The mode of entry and strategy of the MNC is very important Natural resource-seeking invest. = weak links Market and efficiency-seeking invest. = more potential for spillovers o Depend if static (exploiting low-cost labour then move when cost go up) or dynamic (build and upgrade a supplier network) strategy Another key spillover is the extent to which MNCs contribute to quality employment o More MNCs are capital-intensive, they employ less workers than local firms and workers are more skilled and paid better = inequality Depend also on the policy enviro. and state-firm bargaining The poorest are the least likely to be able to implement a framework that generates spillovers THE PEOPLE STRIKE BACK: CONTENTIOUS ISSUES IN THE COMMUNITYMNC RELATIONSHIP (p. 53) How the communities engage with and organize against MNCs The political, social and cultural impact may be negative even when economic spillovers are advantageous Effects: 1. Political: MNCs cultivate political ties both in their home and host country, privileged access to policy-makers revenues used to build patron-client networks 2. Health and environment: Industrial accidents, normal production processes and marketing strategies may have negative impacts (consequence of lower safety or enviro. standards in developing countries 3. Human rights abuses Labour standards developed world standards, in order to lower prices for Northern consumers
#8 MNCs 7 Complicity of MNCs which operated in a country known to violate human rights 4. Culture and lifestyle: encourage conspicuous consumption and adoption of Western lifestyles and values (individualism vs collectivism) People and NGOs may put pressure on MNCs Successful campaigns = mobilization of consumers and citizens pressure in the developed countries against MNCs trying to sell to these same consumers Networks involving both local and foreign NGOs = boomerang pattern (put pressure on intl. Organization and home gov. that will put pressure on host gov. and MNCs) CONCLUSION (p. 53) The author does a small recap. Of the chapter MNCs monolithic, homogeneous actors. Different strategies MNCs do not substitute for domestic effort (MNCs are not entirely responsible for the successes or the failures of de.)