Unit Nine: Multinational Corporations

1. Unit Nine: Multinational Corporations Dr. Russell Williams

2. 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: • Introduction • The Origins of MNCs • MNCs vs. States? • Contemporary Policy Challenges • The Politics of MNC Regulation • Conclusions • Further Reading • For Next Time . . .

3. 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?

4. 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?????

5. 1) Introduction: • Why are we interested in “Multinational Corporations”? =Key site of tension between national political systems (states) and a transnational economy • Under-analyzed . . . . • Spectacular growth and spread of operations in developing economies (see handout) • Can MNCs be regulated given their “mobility”?

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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(?)

12. 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

13. 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 . . .

14. 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

15. 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

16. 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 . . . .

17. 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

18. 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”

19. 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?

20. 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.

21. 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.