Unit Nine: Multinational Corporations

Dr. Russell Williams

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:
1. Introduction
2. The Origins of MNCs
3. MNCs vs. States?
4. Contemporary Policy Challenges
5. The Politics of MNC Regulation
6. Conclusions
7. Further Reading
8. For Next Time . . .
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?

Worlds 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 (1
st
Quarter - 2011)
Politics?????
1) Introduction:
Why are we interested in Multinational
Corporations?

=Key site of tension between national political
systems (states) and a transnational economy

Under-analyzed . . . .
1. Spectacular growth and spread of operations in
developing economies (see handout)
2. Can MNCs be regulated given their mobility?

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
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
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
3) MNCs 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 MNCs 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
MNCs and their Home Countries:

However . . .
Growing Home Country concern about MNC
outsourcing
MNCs 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
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(?)
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
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 shouldnt 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 . . .
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
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
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 . . . .
Attempts to regulate MNCs

1980s 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
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
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?
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.
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.