Lecture Topic: Transnational Production May 8, 2008

1. POLS/ECON 426 International Political Economy A global production map for Panasonic OEM batteries Lecture Topic: Transnational Production May 8, 2008 Professor Timothy C. LimCal State Los Angelestclim@calstatela.edu

2. Dynamics of the World EconomyTransnational Production Transnational Production Let’s begin with some questions … • What is transnational production? • What has been the key mechanismin the growth of transnational production? • Why is transnational production important to our lives? Just think about your answers for now

3. Dynamics of the World EconomyTransnational Production Transnational Production: Definition Transnational production occurs when different parts of the production process for a particular product takes place in different national territories Example: Toyota Motor Co. has a total of 52 overseas manufacturing companies in 26 countries (plus 13 R&D facilities in 7 different countries). Many of the factories are part of an integrated production chain

4. Dynamics of the World EconomyTransnational Production Transnational Production: Definition Almost all automobiles manufactured today, including most Toyota models, are part of an integrated transnational production process. This means different parts of a vehicle may be manufactured in multiple countries (or locations) and shipped to another country. Parts from around the world will then be assembled in a single location. A Toyota Corolla sold in the U.S., for example, will be composed of parts made in a variety of countries (although the U.S. domestic content is 70%). An ostensibly American Ford Fusion is composed of 50% U.S-made parts and 50% parts from other countries.

5. Dynamics of the World EconomyTransnational Production Typical Transnational Production Chain Cars are composed of thousands of parts. which may be sourced or produced in a range of locations throughout the world

6. Dynamics of the World EconomyTransnational Production Transnational Production: Key Mechanism The key mechanism in the growth of transnational production is foreign __________ ____________ : more simply known as FDI refers to investment made outside the home country of the investing company in which control over the resources transferred remains with the investor investment direct FDI

7. Dynamics of the World EconomyTransnational Production Transnational Production: FDI • FDI totaled $1.23 trillion in 2006, with the bulk going to developed economies ($800 billion) • Of developing economies, China receives the largest amount of FDI: in 2006, the inflow of FDI to China was $70 billion, about 20% of the total for the entire developing world (by comparison, all African countries combined received $38.8 of FDI) • While FDI used to flow strictly from the developed to the developing world (and among developed economies), this is no longer true. Examples: in 2004, China’s Lenovo purchased IBM’s PC line for $1.25 billion (Chinese companies are also investing heavily in Africa); more recently India’s Tata purchased Jaguar and Land Rover for $2.3 billion

8. Dynamics of the World EconomyTransnational Production Transnational Production: FDI It is worthwhile repeating that most FDI flows from developed economies to developed economies: the United States, in fact, receives more FDI thanother economy on earth Does this mean that FDI is always good for economiesthat receive it? After all, theU.S. economy is clearly nota “victim” of FDI • Press ReleaseMay 2, 2008 • According to the United States Department of Commerce, the U.S. is the world's largest recipient of foreign direct investment (FDI). In 2007 alone, the U.S. received $199 billion through FDI. In the U.S., more than five million Americans work for companies headquartered overseas. • Impact of FDI • creates jobs, boosts wages • increases exports • brings in new technology • increases productivity

9. Dynamics of the World EconomyTransnational Production Transnational Production: FDI Is FDI good or bad for an economy? • What is the “pro” argument? • What is the “con” argument? In thinking about the question, consider how your answer might change depending on whether an economy is very strong or very weak; whether an economy is already high-wage or low-wage; whether an economy has a strong state or a weak state,strongdomestic firms or weak ones

10. Dynamics of the World EconomyTransnational Production FDI, Good or Bad? A Quick Review Liberals: FDI is good; it provides additional resources and capabilities, access to markets, and management skills that might not otherwise be available • Also provides more tax revenue, more efficient use of resources (land, labor, technology, and capital) Radicals and Mercantilists are skeptical. They are suspicious of foreign firms, and either see the growth of transnational production as new form of imperialism. as a threat to the power and sovereignty of states, or a potential threat to national security More objections: TNCs also bring in management practices that clash with local customs; their power undermines the growth of local business; in extreme cases, they use their influence to influence, undermine, or subvert local political regimes

11. Dynamics of the World EconomyTransnational Production Transnational Production: FDI Ultimately, the question, “Is FDI good or bad?” cannot really be answered in the abstract, for the answer will always depend on a number of concrete conditions and factors, including: • The motivations, “nationality” and power of the investor • The relative strength of the economy and domestic firms • The area of investment (is it “strategically vital”?) • The role of states; the characteristics of firms We also need to keep in mind a truism in IPE/GPE, which is that we live in a world of trade-offs; thus, FDI invariably has both negative and positive aspects for recipients of FDI, and vice versa In 2006, Dubai World Ports (UAE) was set to buy P&O, which operated a number of major commercial seaports on the East Coast. The deal was eventually canceled due to national security concerns. [More on next slide.]

12. Dynamics of the World EconomyTransnational Production P&O-owned commercial ports The Dubai Ports Deal • FDI transactions usually raise little concern in the United States, unless the potential buyer is viewed as suspicious or untrustworthy. Then, foreign “control” of assets is seen as potentially threatening. This was the case was a state-owned UAE company wanted to purchase the port management business in six major U.S. seaports, then operated by P&O Steam Navigation Co. The proposed deal met with stiff resistance on national security grounds. Ironically, P&O is a foreign-owned British company.

13. Dynamics of the World EconomyTransnational Production Transnational Production: Principal Agents Understanding the implications of transnational production requires recognizing who the principal agents are, and the answer is simple: ___________________________________ transnational corporations or TNCs The authors note that there is a hodgepodge of terms used to refer to business entities that engage in transnational production and/or FDI; these include: TNCs, MNCs, MNEs, international firms, TNEs, and global corporations. But, we need to be careful: different terms have different connotations. The authors prefer the term TRANSNATIONAL CORPORATION (TNC) because it more accurately reflects the fact that these firms are usually owned and controlled by the nationals of one country and enter into direct production activities abroad.

14. Dynamics of the World EconomyTransnational Production Transnational Production: Principal Agents “A transnational corporation is any enterprise that undertakes foreign direct investment, owns or controls income gathering assets in more than one country, produces goods or services outside its country of origin, or engages in international production” NOTE: This definition tells us that not all TNCs are huge, uncontrollable firms: they vary in size, resources, organizational structure, and influence potential

15. Dynamics of the World EconomyTransnational Production Transnational Production: Implications IPE/GPE scholars are interested in explaining • The growth of transnational production, • The reasons for the emergence of the TNC, and • The implications of transnational production in general and of TNCs more specifically While all three issues are important, for our purposes, we will focus on just the third: the implications of transnational production and of the growth of TNCs

16. Dynamics of the World EconomyTransnational Production Transnational Production: Implications We have already touched on the implications of transnational production and the role TNCs play in this process, but let’s quickly review the basic positions … Liberals: FDI is good; it provides additional resources and capabilities, access to markets, and management skills that might not otherwise be available • Also provides more tax revenue, more efficient use of resources (land, labor, technology, and capital) Radicals and Mercantilists is problematic. Foreign firms cannot be trusted, so the growth of transnational production is potentially a new form of imperialism, a threat to the power and sovereignty of states, or a potential threat to national security REVIEW The authors tell us that both views are flawed

17. Dynamics of the World EconomyTransnational Production Transnational Production: Implications According to the authors, the basic flaws are clear … • The pro-TNC (liberal) approach fails to think about power in the market • The anti-TNC (radical and Mercantilist) approach gives no credence to governments’ ability to shape economic policy, and/or fails to appreciate fully the structural changes that have already taken place in the world economy So what’s the better view?

18. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment We must take a number of clear steps … First and to repeat: We must avoid the trap of dichotomous thinking reflected in the liberal and radical/mercantilist debate on FDI, TNCs, and transnational production Second (another repetition): To assess the implications of FDI, TNCs, and transnational production, it is necessary to focus on a specific countryand firm characteristics, rather than assuming a general orientation of firms and countries We’ll return to these points shortly, but first a few general points…

19. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment General Points. Despite the warning against assessing the implications of transnational production at too general a level, we can start off with some basic points … • Production has become increasingly globalized • The global production system is dominated by rapid developments in the technological environment, and new technologies have placed innovation at the center of profitability • One of the major reasons for the growth of transnational production has been the accelerated reduction in international transport and communication costs • Innovations in finance has facilitated global production - continued on next slide -

20. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment General Points regarding transnational production … • The globalization of production has been influenced by the policies and politics of national governments • Construction and maintenance of Bretton Woods system • American interests in promoting outward expansion of American business enterprises • Shift by developing countries to attract foreign invesment (e.g., EPZs) • The globalization of production is a response to changing organizational patterns with firms, and changes in the wider system of production • Shift from Fordist to post-Fordist production • Mergers, strategic alliances and joint ventures

21. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment The upshot is this: transnational production is driven by a host of factors, both structural and non-structural • Parts of the process may be automatic, but important parts are not (which means that agency plays a big role) • Key agents are not just TNCs, but also national and even local governments and, perhaps, other non-state actors and movements • Transnational production is a comprehensive process, meaning it involves not just the production structure, but also the finance, knowledge and even security structure: power is clearly at play, but not in a simple one-dimensional way

22. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment It is important to highlight the political dimension of transnational production … why? • Answer: proponents of transnational production--sometimes just referred to as globalization--often argue that it is a largely uncontrollable economic and/or technological process; globalization, in this sense, is portrayed as something that happens to us, rather than something we can control This has very important implications: if you believe this view of globalization, then there’s really nothing we can or should do to stop it, or even to manage it: we simply have to let it run its course

23. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment On the other hand, if we recognize the political aspects of transnational production or globalization, we understand that there’s nothing automatic about the process: it is something we can control or better manage, so that it’s effects are less destructive or more beneficial to a wider range of people and countries This is the position the authors adopt …

24. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment Returning to the basic question: Is FDI good, bad or something else? According to the authors, the answer lies, in large part, in what governments do or are able to do They argue that, for FDI to have a broad positive benefit, states or governments must play a proactive role in deciding what type of FDI to encourage, and in controlling what foreign investors do once they set up operations The authors, in short, assert that the “visible hand” of the state must be used to manage the market process

25. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment What states can do? • One thing governments can do is to ensure that FDI is used to upgrade the quality of the labor force, or by requiring that foreign investors develop sub-contracting relationship with local firms • Another important task is to ensure that domestic firms gain access to new and appropriate technologies through, for example, joint ventures Unfortunately, all of this is easier said than done. As the authors recognize, many governments in the developing world are no match for the productive, financial and knowledge power of the largest TNCs

26. Dynamics of the World EconomyTransnational Production Transnational Production: Assessment What states can do? • In addition, because the world economy is so integrated, states are often in competition with other states for FDI This creates a situation that allows TNCs to play off one state against another to achieve the best deal (this is called regulatory arbitrage) • The changing relationship between states and firms is the topic of another important section in the chapter: State-firm interactions “The issue of the net impact of FDI on host societies is intimately connected with the wider question of the changing relations between the state and the firm.”

27. Dynamics of the World EconomyTransnational Production A Question … Why or how state-firm relations changing in the new global economy?

28. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions Prior to the era of transnational production--when firms were generally confined within national boundaries--they relied on the state to represent their interests at the transnational level Today, this is becoming less and less true: indeed, many scholars believe that the nature of the relationship has changed in a fundamental way. Instead of firms relying on states, states not rely (increasingly) on firms In this regard, one of the biggest changes is the erosion of sovereignty What is sovereignty? Why is it important?

29. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions Sovereignty, a basic definition The supreme and independent power or authority in government as possessed or claimed by a state or community Historically, the sovereignty and, therefore, the power of a state lay in its ability to achieve compliance to whatever it commanded within a territorially defined space Border lines physically defined what was territorially sovereign and what was not. If a state’s sovereignty was challenged from outside its territory, it could resort to force to maintain control. So how are firms challenging sovereignty?

30. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions Sovereignty is challenged through strategies that rely on the relative mobility of TNCs compared to the relatively immobility and geographically limited reach of states (which, ironically, is limited by a self-imposed recognition of sovereignty) Hedley points to three developments that underlie the transnational corporate “threat” to state sovereignty: • the permeability of borders • mobility across borders • border straddling Borders ain’t what they used to be. The IT revolution, for example, has made it very difficult for states to control what gets in and what gets out in terms of information and ideas. Globally connected networks make it increasingly easy to transport, smuggle or traffic goods, services and even people Corporations and other actors increasingly occupy space in different sovereign jurisdictions, which makes it difficult to determine which sovereign jurisdiction takes precedence over which corporate activity Crossing borders used to require a great deal of time, money, effort and even danger. Today, this is less and less the case. Crossing borders is faster, easier, less costly and less dangerous (with obvious exceptions) than its ever been

31. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions Taken together, the permeability of borders, mobility across borders, andborder straddling, these have given TNCs increasing freedom and power In particular, they are able to take advantage of between-border variability Consider this: Different states have different laws and standards regarding all aspects of economic activity. Because of these differences, TNCs can pick-and-choose among different sets of regulatory frameworks and strategically play off one country’s set of rules against another Thus, while TNCs increasingly operate in a de facto borderless world, de jure political and legal distinctions still mark the boundaries on a world map comprised of nation-states

32. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions Historically, between-border variability enhanced the notion of sovereignty by demonstrating that each state was free to establish its own course, and variable customs, laws, and procedures helped to define territorial jurisdiction In today’s world, variability among states diminishes sovereignty This represents the crux of the new form of interaction between TNCs and nation-states

33. Dynamics of the World EconomyTransnational Production Globalization and State-Firm Interactions All of this raises important questions, not the least of which is this: Is a world increasingly subject to corporategovernance (orcorporate rule) a good or bad thing?