Linda Young POLS 400 International Political Economy Wilson Hall ± Room 1122

Multinational Corporations (MNCs)

Fall 2005

The Questions 
What are the potential and perceived problems with MNCs?  Who regulates them and how effectively?  What further regulation would be helpful to various groups?

Linda Young, POLS 400, International Political Economy

Why Not Stay Home?
A MNC firm owns assets that can be exploited on a large scale:  Intellectual property and brand names (other intangibles such as management skills)  Profits from internalizing > than licensing  Difficult to reach terms for licensing  More profitable to produce and sell in another country than to export (due tariffs and other trade barriers)  Services rely on a physical presence

Linda Young, POLS 400, International Political Economy

Statistics on MNCs 
How many MNCs?
± 1900: 3,000 ± 1970: 7,000 ± 1990: 63,000-65,000 ‡ With 850,000 foreign affiliates ‡ Together they employ 90 million people ± 3% world¶s workforce but ± 20% world¶s non-agricultural workforce ‡ Fortune 500 alone ± employed 47 million people in 2000 ‡ In developing countries MNC employ about 30-36 million people
Source: Global Inc: An Atlas of the Multinational Corporation, p. 2 .
Linda Young, POLS 400, International Political Economy

. 123. 2003. p.Source: Global Inc: An Atlas of the Multinational Corporation.

The World¶s Largest Economies Countries Corporations Source: Global Inc: An Atlas of the Multinational Corporation. 2003. 2. . p.

More Interesting Statistics  90% of world¶s 500 largest MNCs are in North America. Chile (5). China (15). POLS 400. South Korea (6). less than 250 employees Linda Young. Japan and Europe ± And the 300 largest firms control 25% world¶s productive resources  50 largest MNCs from developing countries include: ± Mexico (3). but many small. International Political Economy . Brazil (4). India (1)  Some MNCs large. Malaysia (2). South Africa (3). Argentina (2). Saudi Arabia (2).

Measurement: By Foreign Assets. or Market Value That is. but does not own much foreign assets. Linda Young. International Political Economy . Microsoft. POLS 400. most valuable firm of Financial Times list in terms of value of company shares.

86 . Raked by Foreign Assets Source: United National Conference on Trade and Development (UNCTAD). World Investment Report 2002.Twenty Largest Nonfinancial Transnational Corporations in 2000. p.

. 2003.Largest Global Companies by Market Value. Global 500 Financial Times. 2003 Source: Financial Times. Smith Barney web database. May 28.

MNCS are Big Overall  Foreign affiliates of 64. International Political Economy .000 MNCs employ 53 million jobs  FDI the largest source of external finance for developing countries  developing countries inward stock of FDI was approximately 1/3 of GNP ± 10% in 1980  1/3 of global trade Source: Webpage of the United Nations Conference on Trade and Development Linda Young. POLS 400.

POLS 400.Explanations for MNCs Mainstream neoclassical economics Caves: appropriabilityintangible asset theory Product cycle theory Marxist theories Linda Young. International Political Economy .

´ (expounded by Bhagwati)  Location determined by comparative advantage and location theory ± production based where most efficient  Role of imperfect competition prevented development of formal economic theory regarding multinational companies Linda Young.Mainstream Economics  Explanation of trade: Country will export those goods whose production uses intensively their abundant resource  Mundell equivalency ± ³International transfer of factors of production (capital and technology) through FDI is equivalent to trade in terms of the consequences ± for prices and consumption etc. POLS 400. International Political Economy .

POLS 400. IMB invests and produces in many countries in order to maintain good relations with governments  Matters A LOT IF corporations invest or trade ± they undoubtedly try to extend power over governments and other firms  New advances in economic theory strategic trade theory and industrial organization ± have changed the views of neoclassical economists somewhat Linda Young.e.BUT  MNCs large and operate in imperfect markets  Gilpin: MNC experiences are unique corporate experiences ± i.. International Political Economy .

etc. Why not license? Linda Young. unions. POLS 400. regulations. language Sometimes significant cultural obstacles Labor practices. International Political Economy .Firms Face Disadvantages Overseas Have to meet local criteria Figure out rules.

Nokia) Linda Young.Vernon's Product Cycle Theory  American firms have advantage in product development ± large domestic market and superior technology and R&D  With large gaps in wealth and technology between countries. POLS 400. firms expand to take advantage of the gaps  First stage: firm develops new product for sophisticated market ± saturates it ± Requires big investment (Motorola. International Political Economy .

International Political Economy .Product Cycle Theory (con¶t)  Second stage: Product developed. POLS 400. home market created ± then export to other similar (high income) markets  Third stage: technology standardized. less costly ± MNC move to middle income country for production  Technology and nature of the market matters Linda Young.

International Political Economy . POLS 400. may risk basis of its comparative advantage ± no longer able to extract ³rents´ or ³pure profits´ Linda Young. or even management superiority.Caves: Appropriability Theory Why invest abroad rather than license?  Intangible assets ± patents or new technology. are difficult to capture in a contract  If a firm gives up these assets through licensing.

International Political Economy . POLS 400.Marxist Views ± Stephen Hymer  MIT trained in neoclassical economics  Wrote in the 1960s  Views not accepted by peers ± untimely death  Monopoly capitalism driven by two laws 1) law of increasing firm size ± as firms grow and develop they expand across national borders and in doing so they create a core ± periphery structure and an international division of labor Linda Young.

mobility and monopolistic power means that firms control and exploit the world  Corporate activities mean that firms construct a world composed of wealthy.Marxist Views (con¶t) 2) Law of uneven development ± large size. core economies and the impoverished south  The development of the north and the underdevelopment of the south are integral and complimentary ± exist in relationship to each other Linda Young. International Political Economy . POLS 400.

Regionalism Is Important Most FDI is invested in the same region: Europe (Germany in eastern Europe). less uncertainty. Japan in East Asia. and shipping costs! Linda Young. US in North American Less risk and less dependence on labor in manufacturing means perhaps cheaper to use trained. cultural affinities. lean management. skilled. labor Regional production: scale economies. POLS 400. International Political Economy .

International Political Economy .Issues with MNCs Relations with Developing Countries  Labor standards (wages. POLS 400. working conditions and child labor)  Environmental practices: race to the bottom?  North-South not the dominant pattern of investment ± Only 27% in ³developing´ countries ‡ Excluding oil exporting and least developed Linda Young. union representation. hours.

International Political Economy .Issues with MNCs Relations with Developed Countries (con¶t)  Competition Policy ± market power ± both at home and abroad ± Affecting the price and quantity of inputs and outputs  Tax Avoidance  Who should regulate? ± Domestic governments? ± Multilateral institutions? ± Currently through a patchwork of national. regional and multinational agreements ± nothing comprehensive at WTO/multilateral level Linda Young. POLS 400. bilateral.

Changes in National Regulations on FDI. United Nations. 4. bIncluding Source: United Nations Conference on Trade and Development (UNCTAD). International Political Economy . Available at http://www. p. 2004. Table 3.org/en/docs/wir2004overview_en. changes aimed at increasing control. New York and Geneva. POLS 400.unctad. World Investment Report 2004: The Shift Towards Services ± Overview. as well as increased incentives.pdf Linda Young. 1995-2003 1995 Number of countries that introduced changes in their investment regimes Total number of regulator changes Regulator changes m ore favorable to FDI Regulator changes l ess favorable to FDI b a 199 5 114 9 1 199 199 0 1999 3 140 131 9 9 2000 9 150 14 3 2001 1 20 194 14 2002 0 24 23 12 2003 2 244 220 24 4 112 10 151 135 1 145 13 aIncluding liberalizing changes or changes aimed at strengthening market functioning. as well as reducing incentives.

International Political Economy . employment. POLS 400.Nepal Foreign Investment Board  Nepal: 1992 law governs foreign investment. 1996 amended to be more congenial  Goals: provide basic needs. improve balance of payments  Forms: ± Share (equity investment) ± Reinvestment of earnings ‡ Investment in the form of loans Nepal Linda Young.

Areas open for investment: cottage industries. personal services. real estate. retail.Nepal con¶t. tourist business. POLS 400. arms. explosives. fisheries. and consultancy Encourages technology transfer and joint ventures http://www.yomari. atomic energy. International Political Economy . poultry. movies. industries related to radio-active materials.com/fips/ Linda Young. travel agencies. bee-keeping.

Standard Arguments: Positive side of MNCs  Promotes economic growth (China)  Provides lower-priced. POLS 400. International Political Economy . management and marketing skills  Pay higher wages (increase productivity)  Introduces competition to domestic firms Linda Young. higher-quality goods to consumers  Brings capital  Transfers technology: including organizational.

POLS 400. environment  Foreign business can destroy local businesses ± i. soft drinks.Negative Side of MNCs:  Poor citizens of host countries ± Economic power enables exploitation of workers. Coke and Pepsi versus small local manufacturers ± We have concern when Wal*Mart comes to town  Market power ± After firms driven out. International Political Economy . create barriers to entry  When facing new regulations.e.. can move (or threaten to) Linda Young. can exert market power and increase prices.

International Political Economy . in Indonesia ‡ World Bank pressuring government to buy high priced power in Pakistan from MNC ± MNC established with privilege Linda Young.e. then negative (import inputs.Negative Consequences (con¶t)  Balance of payments ± Initially positive. profit repatriation)  Influence governments unduly ± Stiglitz: examples of U.S. government pressuring governments to give favors to MNCs ‡ i.. POLS 400.

International Political Economy . POLS 400.Tax Avoidance Both corporations (and individuals) have mechanisms to elude taxation Growth of electronic commerce will compound Tax-free offshore accounts: International Monetary Fund (IMF) estimates 8 trillion If these deposits earned 5% and were taxed at 40% would raise $160 billion-double the amount required for basic service provision Source Linda Young.

. Available at http://www. 2000.org/80256B3C005BCCF9/httpNetITFramePDF?ReadF orm&parentunid=B96146B4A1B270AFC1256BDF004F7979&parentdoct ype=documentauxiliarypage&netitpath=80256B3C005BCCF9/(httpAuxP ages)/B96146B4A1B270AFC1256BDF004F7979/$file/chap5.Source: United Nations Research Institute for Social Development (UNRISD). ³Calling Corporations to Account. Geneva. Taking Responsibility for Social Development.unrisd. Switzerland.´ In Visible Hands.pdf.

Isle of Man (Dependency of the British Crown) Panama. Belize. Monaco«. Antigua and Barbuda. British Virgin Islands. Liberia. ± about 35 total Linda Young. Cooks Islands. International Political Economy . Bahrain. POLS 400. Aruba. Anguilla (Overseas Territory of the United Kingdom).Tax Havens  OECD publishes a list of tax havens ± Andorra. Bahamas.etc.

new documentation requirements. International Political Economy . improved training and specialisation are some of the tools used by tax authorities in this global "revenue race. Linda Young. our Global Transfer Pricing Team will work with you to develop an overall comprehensive tax planning strategy. POLS 400."  In order to comply with transfer pricing rules worldwide.Price Waterhouse and Transfer Pricing  Transfer pricing describes intercompany pricing arrangements between related business entities applied tangible and intangible property. increased information exchange.  Stricter penalties.

focus on discriminatory treatment of imported and exported goods Linda Young.WTO Rules on MNCs  WTO: Agreement on Trade-Related Investment Measures (only trade in goods) ± No members apply measures prohibited by articles on ³national treatment´ or ³quantitative restrictions´ ± This means no local content or trade balancing measures ± Not concerned with entry and treatment of FDI. POLS 400. International Political Economy .

³Making Global Trade Work for People´  Published by UN Development Program. International Political Economy . protects viability of local input suppliers. POLS 400. response to vertically integrated firms ± Electronics firms ± little local content ± prefer to source from parent companies or affiliates ± value added stays in the industry Linda Young. distinguished advisors  Late developing countries disadvantaged ± Cannot use domestic content requirements ‡ important counterbalance to practices of MNCs ± Local content: protects employment.

Developing Countries  Hard time notifying WTO of practices  Subject to complaints  Denies them policy space to ensure MNCs helpful to them  If WTO provisions (minimal) continued. POLS 400. want special and differential treatment Linda Young. International Political Economy .

POLS 400. generally speaking ± Developed more disciplines.Why? History Matters  Key element in failure of ITO was investment  Differences in developed and developing country preferences. International Political Economy . developing more latitude ± 1955 GATT agreement to encourage bilateral treaties on investment  Differences continued in the URA negotiations ± Called a ³Singapore Issue´ ± Divisive still Linda Young.

.Bilateral and Pluri-Lateral Agreements Most prevalent and generally include provisions on: Admission and treatment of FDI Competition Dispute settlement (i. International Political Economy .e. POLS 400. expropriation) Taxation Corporate conduct Linda Young.

Key Questions Who should regulate? In a multilateral agreement conflict over: í Pre-establishment national treatment í Ability of corporations to sue the state. International Political Economy . POLS 400. but no code for corporations Linda Young.

International Political Economy . let 200 of the men go. and are among poorest in Nigeria. powerful shaming gesture of removing their clothes if the others tried to leave. POLS 400.  Oil site takeovers are common in Nigeria.  Protest shut down the bulk of the company's Nigeria production (an estimated half-million barrels a day).  They want the company to hire sons.Problems Evident  Unarmed women held 700 Chevron Texaco workers inside a southeast Nigeria oil terminal. the world's sixth-largest producer of oil. which lack electricity. and threatened traditional. and the fifth-largest supplier to the United States. Linda Young. and money to develop villages.

Who are the Stakeholders? Consumers ± everywhere MNCs ± Foreign Investors ± Stockholders ± Employees Within host countries ± Elite/government ± possibly ± Domestic companies and their stockholders and employees ± Domestic consumers ± Domestic safety net Linda Young. POLS 400. International Political Economy .

competition policy OECD working in taxation ± voluntary Voluntary codes of conduct for MNCs WTO with minimal regulations Partly due to disagreement  FDI ± developing countries want more choice Linda Young.Regulations Uneven and Inadequate Many bilateral treaties for investment. POLS 400. International Political Economy .