Multinational Corporations (MNCs)

1. Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Multinational Corporations (MNCs) Fall 2005

2. 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?

3. 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

4. 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 .

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

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

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

8. Measurement: By Foreign Assets, or Market Value That is, Microsoft, most valuable firm of Financial Times list in terms of value of company shares, but does not own much foreign assets.

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

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

11. MNCS are Big Overall • Foreign affiliates of 64,000 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

12. Explanations for MNCs Mainstream neoclassicaleconomics Product cycletheory Caves: appropriability-intangible asset theory Marxisttheories

13. Mainstream Economics • Explanation of trade: Country will export those goods whose production uses intensively their abundant resource • Mundell equivalency – “International transfer of factors of production (capital and technology) through FDI is equivalent to trade in terms of the consequences – for prices and consumption etc.” (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

14. BUT • MNCs large and operate in imperfect markets • Gilpin: MNC experiences are unique corporate experiences – i.e., 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

15. Firms Face Disadvantages Overseas Have to meet local criteria Figure out rules; regulations; language Sometimes significant cultural obstacles Labor practices, unions, etc. Why not license?

16. 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, firms expand to take advantage of the gaps • First stage: firm develops new product for sophisticated market – saturates it • Requires big investment (Motorola, Nokia)

17. Product Cycle Theory (con’t) • Second stage: Product developed, 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

18. Caves: Appropriability Theory Why invest abroad rather than license? • Intangible assets – patents or new technology, or even management superiority, are difficult to capture in a contract • If a firm gives up these assets through licensing, may risk basis of its comparative advantage – no longer able to extract “rents” or “pure profits”

19. 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

20. Marxist Views (con’t) 2) Law of uneven development – large size, mobility and monopolistic power means that firms control and exploit the world • Corporate activities mean that firms construct a world composed of wealthy, 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

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

22. Issues with MNCs Relations with Developing Countries • Labor standards (wages, hours, union representation, working conditions and child labor) • Environmental practices: race to the bottom? • North-South not the dominant pattern of investment • Only 27% in “developing” countries • Excluding oil exporting and least developed

23. 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, bilateral, regional and multinational agreements – nothing comprehensive at WTO/multilateral level

24. Changes in National Regulations on FDI, 1995-2003 aIncluding liberalizing changes or changes aimed at strengthening market functioning, as well as increased incentives. bIncluding changes aimed at increasing control, as well as reducing incentives. Source: United Nations Conference on Trade and Development (UNCTAD). 2004. World Investment Report 2004: The Shift Towards Services – Overview. United Nations, New York and Geneva, Table 3, p. 4. Available at http://www.unctad.org/en/docs/wir2004overview_en.pdf

25. Nepal Foreign Investment Board • Nepal: 1992 law governs foreign investment, 1996 amended to be more congenial • Goals: provide basic needs, employment, improve balance of payments • Forms: • Share (equity investment) • Reinvestment of earnings • Investment in the form of loans Nepal

26. Nepal con’t. Areas open for investment: cottage industries, personal services, arms, explosives, industries related to radio-active materials, real estate, movies, retail, travel agencies, tourist business, atomic energy, poultry, fisheries, bee-keeping, and consultancy Encourages technology transfer and joint ventures http://www.yomari.com/fips/

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

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

29. Negative Consequences (con’t) • Balance of payments • Initially positive, then negative (import inputs, profit repatriation) • Influence governments unduly • Stiglitz: examples of U.S. government pressuring governments to give favors to MNCs • i.e., in Indonesia • World Bank pressuring government to buy high priced power in Pakistan from MNC • MNC established with privilege

30. 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

31. Tax Havens • OECD publishes a list of tax havens • Andorra, Anguilla (Overseas Territory of the United Kingdom), Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, British Virgin Islands, Cooks Islands, Liberia, Isle of Man (Dependency of the British Crown) Panama, Monaco….etc. – about 35 total

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

33. WTO Rules on MNCs • WTO: Agreement on Trade-Related Investment Measures (only trade in goods) • No members apply measures prohibited by articles on “national treatment” or “quantitative restrictions” • This means no local content or trade balancing measures • Not concerned with entry and treatment of FDI, focus on discriminatory treatment of imported and exported goods

34. “Making Global Trade Work for People” • Published by UN Development Program, distinguished advisors • Late developing countries disadvantaged • Cannot use domestic content requirements • important counterbalance to practices of MNCs • Local content: protects employment, protects viability of local input suppliers, response to vertically integrated firms • Electronics firms – little local content – prefer to source from parent companies or affiliates – value added stays in the industry

35. 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, want special and differential treatment

36. Why? History Matters • Key element in failure of ITO was investment • Differences in developed and developing country preferences, generally speaking • Developed more disciplines, developing more latitude • 1955 GATT agreement to encourage bilateral treaties on investment • Differences continued in the URA negotiations • Called a “Singapore Issue” • Divisive still

37. Bilateral and Pluri-Lateral Agreements Most prevalent and generally include provisions on: Admission and treatment of FDI Dispute settlement (i.e., expropriation) Competition Taxation Corporate conduct

38. Key Questions In a multilateral agreement conflict over: • Pre-establishment national treatment • Ability of corporations to sue the state, but no code for corporations Who should regulate?

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

40. 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

41. Regulations Uneven and Inadequate Many bilateral treaties for investment, 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