multinational corporations and nation-states:
TRANSCRIPT
MASARYK UNIVERSITY IN BRNO
FACULTY OF SOCIAL SCIENCES
Department of International Relations and European
Studies
Major: International Relations and European Studies
MULTINATIONAL CORPORATIONS
AND NATION-STATES:
PARTNERS, ADVERSARIES OR AUTONOMOUS ACTORS?
Diploma Thesis
Martina Steinbockova
Thesis Leader: PhDr. Pavel Pšeja, Ph.D.
2
UCO: 64635 Year of matriculation: 2004 Brno, 2007
By my signature below, I pledge and certify that this diploma thesis is
entirely my own work. I have faithfully and exactly cited all the
sources I have used.
3
In London, December 3, 2007.
______________________
4
I would like to thank PhDr. Pavel Pšeja, Ph.D. for leading this thesis,
prof. Morris Shapero from Eckerd College for support and to Dr.
Blake Hawley and his team for inspiration.
INDEX
1. Introduction .......................................................................................6
1.1. Methodology of the Thesis ............................................................ 9
1.2. Introduction to Key Terms ........................................................... 11
1.2.1. The Concept of MNCs ......................................................... 11
1.2.2. The Concept of Nation-states............................................. 15
2. Development of the Relationships Between Nation-states and MNCs
19
2.1. Three Phases in the Development of the Interaction Between
Nation-states and MNCs .................................................................... 19
2.2. Initial Thoughts on the Relationships Between MNCs and Nation-
states .................................................................................................. 21
2.3. Sovereignty at Bay? .................................................................... 22
2.4. Globalization ............................................................................... 26
3. Government Still on the Throne? ...................................................... 29
3.1. Policies of the State .................................................................... 30
3.1.1. Trade Policy and Capital Control ....................................... 30
3.1.2. Foreign Direct Investment Rules.......................................... 33
3.1.3. Regulation and Antitrust Policy........................................... 36
3.2. Extraterritoriality .......................................................................... 39
3.3. Government’s Bargaining Power ................................................ 40
3.4. New Means of Control: Governments on the Multinational Level
44
4. Multinational Corporations on the Move ............................................ 46
4.1. Market Entry: The Choice ............................................................ 47
4.1.1. The First Steps: Exports, Licence and Franchise .................. 49
4.1.2. The Second Step: Fusions and Acquisitions ........................ 51
5
4.1.3. The Third Step: Joint-ventures and Alliances ...................... 53
4.1.4. Final Steps: Wholly-owned Subsidiary and Other Structures
55
4.2. Internalization and Impact on States’ Economy ........................ 56
4.3. The Structure of MNCs ................................................................. 57
4.4. Corporations’ Bargaining Power................................................. 59
4.5. Note on Multinational Consortia of MNCs .................................. 60
6
5. The Patterns of Relationships Between Nation-states and MNCs......... 61
5.1. MNCs and Nation-states as Partners (Cooperation Patterns) .... 61
5.1.1. Cooperation in the Economic Area and Development ..... 63
5.1.2. Cooperation in the Social Area .......................................... 66
5.1.3. Cooperation in the Political and Cultural Area ................. 67
5.2. MNCs and Nation-states as Adversaries (Confrontation Patterns)
69
5.2.1. Confrontation in General Legal and Market Control ......... 71
5.2.2. Confrontation in Market Stability and Other Economic
Policies ...................................................................................................... 72
5.2.3. Confrontation in Forms of Intervention ............................... 74
5.2.4. Confrontation in Nationalism and Social Policies .............. 77
5.3. MNCs and Nation-states as Dependent Actors
(Interdependence .................................................................................... 79
Patterns) ............................................................................................. 79
5.3.1. Finance and Taxes Causing Interdependence .................. 80
5.3.2. Interdependence in the Bargaining Process ...................... 81
5.3.3. Interdependence in Form of Networks and Alliances ........ 83
5.4. MNCs and Nation-states as Autonomous Actors (Independence
Patterns
............................................................................................................ 85
5.4.1. Autonomy Through Internalization ...................................... 86
5.4.2. Autonomy in Monetary Issues ............................................. 88
5.5. MNCs – Nation-states relationships: The Synthesis ...................... 89
5.5.1. Dunning’s Schematic and Bargaining Model ..................... 89
5.5.2. Consistency Between MNCs’ and Nation-states’ Goals .... 92
5.5.3. Global Integration vs. National Responsiveness................. 93
5.5.4. General Techniques and Strategies of MNCs towards
Nation-states ............................................................................................
93
6. Conclusion............................................................................................. 96
Bibliography ......................................................................................... 104
List of Used Abbreviations .................................................................... 112
Appendices .......................................................................................... 113
7
8
1. Introduction
In today’s world political system we can hardly find any more
mutually distinctive actors than nation-states and Multinational
corporations (MNCs). They are endowed with contrasting features
that characterize their nature, show their functions and guide their
actions: Nation-states being territorially defined in the (post-
Westphalian) world political system, providing framework for
political, economic, social and cultural activities of domestic actors,
pursuing national interests in order to promote the welfare of their
population while MNCs expand their operations regardless of state
boundaries, cope with diverse political, economic, social and
cultural environments of acquired markets and are driven purely by
private interests based on economy of scale, effective international
management and global economic trends. These two completely
different world politics actors pursue their goals in the same arena of
world political system.
Naturally, such a juxtaposition raises number of relevant questions
that constitute one of the biggest contemporary debates in both
international political economy (IPE) and wider public discussion:
How can such different actors exist in the same system? Does their
development change the nature of the world political system or are
their internal changes a consequence of the system’s development?
What means of control have nation-states preserved over the MNCs?
How do MNCs execute their power over the territories of nation-
states? Are the relationships between nation-states and MNCs
always antagonistic or do these actors ever join their forces to
achieve mutual goals?
A general insight into this topic clearly shows the overall complexity
of this debate and arising topics. Apparently, it is not within the
scope of this study to analyze the whole extent of this problem and
9
for the purpose of this thesis only a selected part of this debate will
be subject to a more detailed analysis. The study focuses on the
means of control which the nation-state has preserved, modified or
developed over its key characteristics (territory, population and
government) facing the increasing pressures from MNCs. The main
focus is paid to territory and government since these two features of
the nation-state are crucial to the second part of the thesis which
analyses the relationship patterns which exist or arise between
nation-states and MNCs. The author is aware of certain limitations of
the study arising from its interdisciplinary nature, individual factors
that have to be omitted when providing a general analysis and a
lack of adequate primary sources especially from the MNCs which
are protected by trade secret or simply kept internal within the
corporate structures.
The thesis is built upon specific logics that is reflected in the
sequence of the chapters. Following the first chapter which defines
the key terms and concepts used in the thesis the second part
provides a brief overlook of the development of the relationship
between MNCs and nation-states and also its reflection in
theoretical approaches and major published studies. The next two
chapters analyze specific position, characteristics, instruments and
means of control possessed by governments (as the main authority
in nation-states) and MNCs. In the section dedicated to the
government, its internal decision-making process, rule-setting
patterns as well as the implementation of policies and their
application within the borders (and beyond them) are examined in
detail. Special focus is devoted to the bargaining process and
sources of bargaining power on the state’s side. The fourth chapter
analyzes the MNCs as global actors not limited by territorial
boundaries, endowed with freedom of choice of strategies and
development schemes, focused on private goals in their internal
10
planning and operations and being inherently reluctant to share
their goals and strategies how to attain their defined objectives.
The structure of the thesis continues with the following chapter that
summarizes the frameworks of relationships between MNCs and
nation-states. The author builds this part mostly upon the findings
from the previous chapters and presents an authentic classification
of major interaction schemes between nation-states and MNCs,
each of them analyzed by the focus area, reason or consequence.
To show alternative approaches to this topic, three major interaction
models by various researchers are analyzed in the end of this
chapter. The last part concludes on government’s and MNC’s role in
the interactions, provides a brief overlook at possible areas of future
studies, summarizes the analyzed questions and gives answers to the
hypothesis.
Despite of the up-to-dateness of the analyzed topic the nature of
relationships between nation-states and MNCs has been subject to
academic as well as popular discussion since 1960’s. The concepts
of state sovereignty, autonomy and control of nation-states were
being questioned concurrently with the first visible consequences of
the globalization process. However, the end of Cold War, latest
development in communication and information technologies
including the Internet as well as other major changes at the close of
20th century have given this debate a new dimension.
A strong group of academic research argues that the globalization
of 21st century and cyberspace have brought the previously
envisaged “decline of the nation-state” – the traditional post-
Westphalian system of territorially defined countries is no longer
sustainable facing the pressures of global economic forces driven by
global interests and activities of its most visible flagship:
Multinational corporations. As such, these large companies have
11
been completely deprived of the links with their home (and any
other) country and have become real “stateless” entities1 arranging
its global operations worldwide to produce products and offer
services at the lowest costs to the widest consumer groups possible.
These activities of MNCs have transformed the world into one major
marketplace with an agreed set of business rules and procedures
that transcend national boundaries.
Since such opinions are common not even within the IPE research
but also in an increasing number of public discussions, the author
supposes that these thoughts are worth investigating in a separate
study. Therefore, this thesis will work with the following primary
hypothesis: Multinational corporations pursuing global strategies
have forced nation-states to surrender control over their traditional
key characteristics (territory, population, government). The
implication of this trend constitutes the secondary hypothesis of this
study: Nation-states and MNCs are currently placed due to their
incompatible interests into predominantly confronting relationships.
The author is aware of the extreme positioning of this approach in
the spectrum of contemporary IPE research; however, she assumes
that such a hypothesis can help investigate how far the “eroding”
concept of the nation-state has gone so far.
1.1. Methodology of the Thesis
The rationale of this study is based on creating a general overlook at
relationships existing and arising between nation-states and MNCs
within their complexity. However, the author is fully aware of the
complexity of the analyzed topic and the above outlined questions
as well as of the difficult operationalization of the various processes
arising between actors of such a different nature.
1 This expression was used by Korten (1995).
12
In particular, there are several major factors that substantially restrict
the level of the analysis as well as the results of this study. First, the
generalization of the “Multinational corporation” term is difficult to
be made due to extensive variations among the current examples
MNCs (corporations are of different size, age, nationality industry,
pursuing distinct decision-making processes and strategy-setting
patterns, etc.).2 Second, any research on MNCs deals with
retrospective and indirect evidence of MNCs’ strategies since the
strategic steps of such companies are not announced in advance or
publicly, and thus, can be analyzed only retrospectively and mostly
through secondary sources. Similarly to that, the third limitation
inheres in the relative (case-specific) nature of the concepts of
relationship and bargaining power. In other words, each MNC
interacts with each nation-state in a different way which creates a
number of patterns that have to be generalized. Fourth, the
relationship is a dynamic concept itself – short-term changes and
fluctuations arising from immediate factors are hard to be
incorporated and the complex development in medium- and long-
term perspective is difficult to analyze. Therefore, this study focuses
on key moments of the relationship (e.g. beginning, crisis,
termination) which shape its general framework. Finally, besides the
political, social and cultural differences within nation-states (and
also MNCs), there is a number of other factors which shape the
relationship between these two actors: Both internal (e.g.
psychological)3 and external4 factors are hard to be reflected in a
study of this kind.
Therefore, the conclusions of this study will be certain way simplified
and thus, not strictly applicable for the range of all possible
2 Similarly to that, the nation-state is regarded as a concept not reflecting the actual differences between countries based on their size, population, political, social and cultural differences etc. 3 In the internal factors two major restrictive groups of factors can be distinguished: Individual (psychological of key individuals in power) and collective (e.g. national historical experience, approach to minorities, etc.). 4 External factors include influences emanating from the world system (e.g. global economic trends) that are outside of MNCs’ or Nation-states’ control.
13
interactions between nation-states and MNCs. Nevertheless, this is a
natural consequence of this kind of research – when working with
concepts of actors the outcome of the research will naturally turn
into a conceptualized framework as well. On the other hand, the
thesis will seek to demonstrate the analyzed aspects with examples
(generally in form of footnotes) in order to prevent the text from
being too theoretical, lacking the reference to the reality.
Regarding the sources used for elaboration of the topic, the thesis is
working with a range of primary sources such as research studies
and analytical data. Also, on a very limited basis, participant
observation is incorporated as a primary source.5 As it was
highlighted before, the lack of primary sources directly originating
from the MNCs cause certain deficiency in sources: While
governments do release and publish data on their activities
(policies), most of MNC’s actions and strategies have to be analyzed
retrospectively. Only statistical reports on MNCs (used in this study as
well) form a significant primary source on MNCs.
Apart from that, a large proportion of the sources used in this thesis
derive from secondary data (such as articles, handbooks, reviews,
review articles, textbooks and collected works). Alternatively to the
approach to sources used in this study, more primary sources could
be used to support the dissertation’s conclusions (such as surveys,
experiments or interviews with key decision-makers). However, such
sourcing would be extremely costly and exigent while its impact
would be in general very limited because of their partial
correspondence to the general nature of this study.
Concerning the origins of the sources, the study works with a wide
range of sources from the USA, France, United Kingdom and several
Asian studies. Such a selection should help to analyze the area of
5 This participant observation derives from author’s internship carried out with a MNC (Hills’ Pet Nutrition Inc.) during the work on this study.
14
study in a more complex light, reflecting a wider spectrum of
academic research on MNCs and nation-states.
This study uses various methods (analysis, classification, synthesis,
discourse analysis, historical analysis) in order to provide an overall
point of view at the relationships existing and arising between
nation-states and MNCs. The chapters three and four (on the
instruments and means of means control possessed by nation-states
and MNCs) form the analytical part which is the base for the
synthesizing chapter five dealing with the patterns of relations
occurring between those two actors. Apart from that, chapter two
employs a historical analysis when presenting the development of
the MNCs – nation-states relationships.
1.2. Introduction to Key Terms
The thesis works with two major types of actors: Multinational
corporations (MNCs) and nation-states. At this moment, the author
finds essential to define these two terms in order to provide a solid
basis for the following analysis of their relationship.
1.2.1. The Concept of MNCs
Regarding the MNCs, there are numerous definitions of MNCs. The
simplest ones define a multinational corporation as an enterprise
which possesses at least one unit of production in a foreign country
(Meier and Schier 2001: 8). Such a simple definition inheres one big
advantage – no important aspect of the phenomenon (e.g.
financial, local or internal affairs) or of the problem (for example
complex questions of nationally associated corporations or small e-
commerce companies) is arbitrarily excluded.6
6 This is, according to the author of this thesis, a major advantage of this kind of definition compared to the earlier ones. Most of the contemporary studies on MNCs do not indicate any exact definitions based on MNCs’ size, number of acquired markets, percentage of goods and services produced by the affiliates etc. since current MNCs differ substantially from each other in the above stated figures that such definition would naturally mean to exclusion of certain (modern) types of MNCs.
15
The multinational corporation (or enterprise)7 generally consists of
the parent company (the resident of one country) and at least one
affiliate (resident of another country). For the purpose of this thesis,
the first is called a home country and the latter is called host (or
recipient) country. The company A is considered an affiliate of the
company B if the firm B possesses at least 10 % of the capital of the
company A. Furthermore, research papers distinguish between a
minority control (when the B’s capital in the company A reaches 10
– 50 %) and a majority control (when A owns more than 50 % of A’s
capital).8
Apart from the simple definition stated above, the research papers
on MNCs have come up with more specific definitions. Andreff
(2003: 6), for example, defines the MNC in a more theoretical way as
an enterprise whose capital is acquired in the process of
international accumulation. Meier and Schier (2001: 8) come up with
a more strategic definition stating that the MNC is an organization
owing or controlling enterprises or physical and financial assets in at
least two countries of global economy and opting for a multi-
domestic strategy founded on social-economic differences of these
countries (as a reply to specific local demand).
Concerning the term itself, the enterprise operating in more than
one country is referred to as a multinational (or sometimes
transnational) corporation. The terms are sometimes in the literature
used interchangeably, sometimes they are strictly differentiated.
Especially the earlier analysts9 tended to make substantial
differences between those two terms: According to these studies, if
the company pursues its strategy and integrates its activities across
national borders, it should be referred to as “transnational” while
7 The terms of Multinational Corporation or Multinational enterprise will be used in this thesis interchangeably. The author is aware of the fact that in some sources the terms might be used with minor differences in the meaning. Nevertheless, this study treats both terms equally. 8 More on these statistical issues on the MNCs in Levasseur (2002). 9 Such as Blake and Walter (1976) or Gill and Law (1989).
16
when its control and ownership are shared fairly and equally
between a number of different countries (and thus, the corporation
“takes on” many national identities), it should be called
“multinational”. The author of this thesis realizes the original thought
on this division; however, similar conclusions could be too misleading
in today’s complex reality of MNCs. The outlined differences remain
therefore not in the structure of the corporation but in its strategy
towards its operations.10 That is why, using a different term based on
enterprise’s strategy would be in regard to the topic of this thesis
extremely confusing.11
Therefore, the thesis works exclusively with the term of a
multinational corporation. Another reason for this choice is also its
position in the developmental stages of a corporation expanding its
operations beyond national borders. As Meier and Schier (2001)
clearly state the enterprises generally expand through several
stages: Starting from an international corporation (mainly exporting
its products/services) to a multinational corporation (organizing
production across borders) and moving to the final stage of a
world/global corporation (with functions integrated on a global
level). Similarly to the earlier argument, the general division between
“multinational” and “global” enterprise cannot be drawn universally
for all corporations. Since the main purpose of this thesis is to present
the concept of a corporation operating in more countries and not to
pay attention to individual differences, the term “multinational”
corporation will be used universally for all enterprises with operations
overseas without any further reference to the stage of their
international/multinational/global engagement.12
10 The strategy that a MNC adopts towards its affiliates overseas is subject to chapter 5.5.3. 11 Therefore, using the term “transnational” could be another option for this thesis. For the reasons outlined further, the author voted in the end for the term “multinational corporation”. 12 Another reason for this conclusion lies in divergent opinions on the stages of development of MNCs. For example, Christian Chavagneux (2001) describes the concept of a “world company” as a phantasm because according to him, the company which is a total stateless entity deprived of all possible linkages to territories, has not occurred yet.
17
Another area that remains quite challenging for the MNC-oriented
studies is to define a general concept of a MNC’s internal structure
and linkages between the parent company and its affiliates. One of
the most general patterns was introduced by Schier and Meier in
their comprehensive study in 2001. These authors distinguished three
major types operations arising in the intra-company relations: purely
financial (including the capital transfers), local (performed
exclusively by the affiliate) and intra-group (managerial control and
intra-firm trade). Refer to Appendix 1 for the corresponding graph.
In addition to that, the types of MNCs are becoming more and more
difficult to classify. One of the most common divisions of MNCs
distinguishes between extraction, manufacturing and service
corporations.13 Another approach presents the classification
between the following three categories: First, horizontally integrated
companies which acquire additional business activities at the same
level of the value chain. Second, vertically integrated corporations
which are composed of a network of operations in upstream and
downstream activities in the production process. The last category is
referred to as a conglomerate structure when the corporate
divisions operate as relatively autonomous businesses under a larger
corporate umbrella and as such, constitute self-contained strategic
business units while each of them produces a single product.
This classification is closely connected to the theories providing
framework for MNCs and their affiliates. Although the main part of
theoretical approaches to the relationships between MNCs and
nation-states is subject to the following chapter, let me point out
three major concepts connected exclusively to the MNCs. First, the
product-cycle theory, built upon the phases of maturing of a
13 According to the latest World Investment Report executed by UNCTAD (United Nations Conference on Trade and Development), the services account for nearly two thirds of FDI, manufacturing for 30% (has declined from 41% in 1990) and the share of extractive industries in total FDI increased a little between 2000 and 2005, but generally having been on the decline since the Second World War.
18
product and its production technology, provides one of the
common frameworks for reasoning of company’s expansion to new
markets.14 Second, the organization theory deals mainly with the
phenomenon of vertically integrated companies and the way they
coordinate the successive stages of production.15
Finally, the theory of competitive advantage serves as a basis for
rationalization of international fragmentation of production. The
production activities of a MNC are divided into the international
network of production sites according to their comparative
advantages in the different phases of production process (Levasseur
2002: 119). Apart from that, the competitive advantages further play
an important role in the bargaining process.16
The number as well as the scope of operations of MNCs have been
increasing continuously since their first emergence. Currently, there
are about 78 000 multinationals worldwide with more than 780 000
foreign affiliates, accounting for the equivalent of 10 % of world GDP
and one third of world exports. Check appendixes 2, 3 and 4 for
additional statistical data on current MNCs and their performance.
1.2.2. The Concept of Nation-states
The concept of nation-state as it is understood nowadays can be
defined as a political unit based on contiguous territory, usually with
a single or dominant language, shared traditions, independent of
outside forces. However, such a definition is a result of both historical
and theoretical development.
Regarding the historical line, the concept of the nation-state, as
(Grunwald 1999) argues, is a relatively new creation – it came into
being roughly 400 years ago with the collapse of the feudal order in
14 More on Product-cycle theory in Onkvisit and Shaw (1989). 15 Refer to Shafritz and Whitbeck (1978) or Lynch and Dicker (1998) for the more detailed elaboration of the organization theory. 16 See chapter 3.3., 4.4. and 5.3.2. For further information on this theory see Mucchielli (1998).
19
Europe. These major changes in the interstate order originated a
new, post-Westphalian era of world system organization built on
existence of sovereign political units.
Concerning the theoretical arguments, nation-state is defined as a
“long-standing linguistic trick” (Willetts 2001) which merges the state
and the nation into one construct. The term is widely used nowadays
although strictu senso there are very few states in the world that
comprise of one single nation. Also, the concept itself does not
reflect the actual differences between the states in terms of size,
economic and political power, strategic geographic location etc. In
fact, the state itself is not defined as a material object but as a
conceptual abstraction (Dunleavy and O’Leary 1987: 1). According
to Max Weber, the (modern) state cannot be defined by its ends but
primarily by its means and functions.17
Therefore, it is not easy to provide a comprehensive definition of the
state, modern state or nation-state. The “state” generally can
defined in many ways depending on the point of view that the
researcher takes: It can stand for an internationally recognized
entity (in international law), be defined as a country with a
community of people interacting in the same political system and
sharing the same values (in international politics) and also as a
government covering the legislature, administration, judiciary,
armed force and police (is philosophy and sociology).
However, it is not within the scope of this thesis to investigate in a
greater detail all the state-centric approaches and their debates on
the nation-state. This study will work with the term “nation-state” in
the widely accepted definition (in paragraph one of this
subchapter). More importantly, the nation-state will be worked with
as the concept built upon three key attributes that define its
17 Roskin (2007) , for example, resigns on distinguishing between modern state, state or nation-state and is concerned more about the concept than about the actual term.
20
existence: Territory, population and government. Territory refers to
the clearly defined over which the nation-state claims its sole
legitimate authority (Pierson 2004). Population refers to the people
who share cultural, political and social values and are linked
towards the nation-state through the concept of citizenship, which,
consequently gives them the right to participate in the life of
political community. Finally, the concept of government is very
extensive since it covers the control of the means of violence
(monopoly of use of force), sovereignty (discussed below), rule of
law, administration and bureaucracy.
The nation-state as described above works as a unique
configuration of territorial space and thus, constitutes a central
element of modernity in the international political scheme. The key
attribute of the nation-state is the concept of sovereignty. As Ruggie
(1993: 151) points out, sovereign states are the distinctive signature
of the modern political world, being territorially disjoint, mutually
exclusive, functionally similar. The sovereignty as a crucial attribute
of the nation-state can be defined as the power to choose between
alternative courses of action or, in Krasner’s (2001) words, two
powers exercised by the nation-states in relation to other countries
as well as exercised over its own members.
The formal sovereignty is a recognized legal concept defining that
within an exclusive territory demarcated by unambiguous borders
each state is recognized as supreme and independent of outside
authorities in its own exercise of power. The exclusive execution of
power within the territory is carried out through the use of force by
the sovereign authority. When this is threatened, the authority has
right to declare war on the enemies of the state or to act otherwise
to protect and promote its national interests.
21
Consequently, this concept is reflected into two dimensions of
sovereignty: Internal sovereignty defines the legitimization of the
state vis-à-vis the competing domestic interest groups while the
monopoly of force is assumed as the instrument to exercise the
undisputed right to rule, regulate and govern within the nation-
state’s territory.18 In contrast to that, the external sovereignty serves
as the organizing principle of the interstate (international) order and
assumes both mutually exclusive territoriality and mutual recognition
by the territorially defined units. Thus, this external dimension of
sovereignty defines relations among nation-states in the
international system.19
While the internal sovereignty tends to be regarded as absolute in
theory, it is rarely so in practice. The exclusive right to rule is
compromised any time the nation-state enters an international
agreement. Even though the international system lacks any central
authority and the compliance with such treaties depends on the
nation-state’s will, a growing number of rules of the interdependent
world economy has been restricting state’s room to maneuver.20
In contrast to that, the external sovereignty remains closer to the
absolute concept thanks to its relative nature. This part of
sovereignty is defined in relation to the by like units and the modern
interstate system works on the principle that the economic and
political governance are a function of borders and geographic
jurisdiction (Kobrin 2001: 191).
As the thesis covers quite a wide range of nation-states’ activities, it
is crucial at this moment to stress out four different kinds and
degrees of sovereignty (Dunning 1992) that will play a role in further
analysis: First, economic sovereignty reflects the ability of the state
authority to manage country’s resources for wealth-creating 18 Internal sovereignty is subject to many international politics studies, such as Dunn’s (1994) article. 19 For more details on the external sovereignty and its principles consult Barkin and Cronin (1994) or Hall (1999). 20 More on the state’s position in the integrating world economy in Keohane and Nye (1977).
22
activities. Second, legal sovereignty means the right to impose rules
and regulations independently. Third, cultural sovereignty
incorporates the country’s freedom to determine its own culture and
way of life as well as the degree of absorbing outside influences.
Finally, the general concept of political sovereignty includes all
three preceding “sovereignties” and corresponds to the
combination of external and internal sovereignty described above.
The concept of internal sovereignty is closely related to the nation-
states’ autonomy. The autonomy is defined as the state’s authority
to make its own decisions about dealing with internal and external
problems. Being autonomous in the international politics theory
means to have unambiguous control over the economy and
economic actors within the nation-state’s territory and also to pursue
effective policy without being constrained by outside forces.21
In regard to this thesis, the term “nation-state” will be used generally
as a concept. However, in situations when it is necessary, the thesis
will distinguish between two major positions that the nation-state
can appear in: The so-called home country (home nation-state)
refers to the state in which the MNC originates from while the host
country (host nation-state, recipient state) stands for the country in
which the MNC is coming as a foreign entity to establish its
operations.
2. Development of the Relationships Between Nation-states
and MNCs
Having defined and characterized the two major international
actors, nation-states and MNCs, it is time to look into the
relationships arising in between them. Since the international
political system has undergone major changes from the emergence
21 The autonomy as the characteristic of the nation-states is subject to numerous studies, for example Keohane and Goldstein (1993) or Waltz (1969)
23
of the first multinational company in the late 19th century until
nowadays, the characteristics of both nation-states and MNCs have
changed and so have the relationships between them.22
First, we will examine the changes in the interaction between nation-
states and MNCs based on Dunning’s three-phase approach and
afterwards, a brief insight into the major influential literature that has
reflected the development between the two actors will be provided.
Special focus will be placed on recent development, especially the
trends of globalization and cyberspace – a new feature changing
the traditional concept of territoriality.
2.1. Three Phases in the Development of the Interaction
Between Nation-states and MNCs
As it was indicated before, nation-states and MNCs cannot be
considered stable entities in the constantly changing international
political system. Both actors have experienced major changes
during the second half of the 20th century which have shaped their
specific relationships until these days.
Dunning (1992) identifies three fairly distinct phases in the
development of nation-states – MNCs interaction: The Honeymoon
phase (early 1950’s – mid 1960’s), the Confrontation phase (mid
1960’s – late 1970’s) and the Reconciliation phase (late 1970’s till
present). Being aware of the fact that the dates vary between
companies and countries, the major features of the relationship can
be identified within the time periods stated above.
The Honeymoon phase starting in early 50’s was characterized by a
very positive approach towards multinational enterprises coming to
the war-ravaged (European) countries because all the associated
22 It is also worth mentioning that there were special relationships between nation-states and predecessors of MNCs. Generally, these companies were founded and regulated by home countries’ legislation, granted monopoly or very favourable trade privileges over certain region (or sector) and, although private, were endowed with a great deal of state-like competences (e.g. military, police or administration functions). The Honourable East India Company, founded in 1600, could be a good example of these very early multinationals.
24
elements such as technology, capital, entrepreneurship, managerial
and organizational skills were desperately needed. In early after-war
period, the relationships between MNCs and states were extremely
mutually beneficial since the expanding companies found new
markets for their products as well as sources of raw materials and
energy. Other countries besides Europe were not heavily targeted
by MNCs yet.
The attitude of nation-states towards newly coming foreign
companies was beginning to change slowly in 1960’s. Countries
have managed to satisfy basic needs of the state and its inhabitants
and have gained enough self-faith to stress out their own interests
and priorities, partly because of the Keynesian approach to the
economic management. Economic results were weighed against the
socially desirable goals, such as employing local workforce in high
value-added activities compared to previously sufficient labour-
intensive jobs. Multinational companies have reflected the latest
development of the international environment in their organizational
structure and therefore, have become more centralized and multi-
divisionally controlled.
In late 70’s the MNCs became most heavily criticized for their
unacceptable behaviour resulting in uneven contribution to
economic development and unfair distribution of world wealth. This
negative approach to the multinational entities was reflected in
political activities of the nation-states, such as frequent
expropriations, restrictions on new investment flows or heavy
regulation of MNCs’ performance. However, the intention of such
steps to target MNCs headquarters was often missed and the costs
and obstacles resulting from national regulations had to be born
mostly by local subsidiaries. Consequently, the concept of
25
bargaining power23 became a key issue in state-MNCs negotiations
and confrontations.
This strongly confrontational period in MNCs and nation-states
relationships finished by the end of 70’s with implementing more
constructive solutions and effective instruments from both sides.
Governments realized the necessity to refine, modify and extend the
scope of their policies in order to make use of the inward
investments. The MNCs, on the other hand, reviewed their attitudes
and activities in the acquired markets and focused on drawing up
codes of conduct as well as easing the communication on both
local and global activities, more and more often engaging in cross-
border strategic alliances and transnational ventures.
In early 1980’s international business became more politicised. The
MNCs-states relationships became heavily influenced by social
implications of their activities, such as environmental protection that
soon after constituted influential part of political agenda. As
Dunning (1992: 558) concludes the 1980s witnessed the emergence
of a more mature and symbiotic relationship between MNEs and
governments. The nature of the interaction came back to the
importance of mutual commitment, building trust and effective
partnership.
2.2. Initial Thoughts on the Relationships Between MNCs and
Nation-states
Although modern multinational corporations are known since late
19th century, there was initially little academic interest in these newly
emerging actors. The first person who distinguished between the
portfolio and direct investment and defined the basic elements of a
multinationally operating company was David Lilienthan at Carnegie
Mellon University in 1960. Before that, little attention was paid to
23 See chapters 3.3., 4.4. and 5.3.2. on bargaining power.
26
foreign direct investment (FDI), the main focus was on economic
and macropolitical aspects of the capital flow. Dramatic change
came in the Honeymoon stage (early 50’s) with studies on the FDI
phenomenon (by e.g. Edith Penrose or Stephen Hymer), the shift
from capital flows to wider implications of FDI as well as the impact
of MNCs on home and host countries. All these studies prepared the
ground for a more publicized discussion on the eroding sovereignty
of a nation-state called “Sovereignty at Bay?” by Raymond Vernon
(1971).
2.3. Sovereignty at Bay?
Raymond Vernon’s influential study on multinational corporations
called “Sovereignty at Bay?” (with the question mark) gave the
discussion on the relationships between MNCs and nation-states a
new dimension and also a higher publicity. The basic idea of this
book published in 1971 is that increasing economic
interdependence, technological advances in communication and
transportation have made the nation-state an anachronism. The
state is no longer in control over its economic affairs because MNCs
have proven that they are able to provide domestic economic
welfare and organize effective production of goods on a much
more efficient scale than the governments.
Vernon (1971) justified the title “Sovereignty at Bay” based on three
major propositions. Firstly, most governments are reluctant to give up
advantages that MNCs are bringing to their economy. Secondly,
subsidiaries never respond single mindedly to the provisions of their
home state’s jurisdiction because they are bound by the global
strategies of the MNCs. Finally, the MNCs global network serves as a
channel of influence on other states. Vernon’s critics24 point out that
none these arguments deal directly with sovereignty.
24 E.g. Kobrin (2001), Gilpin (1985).
27
The “Sovereignty at Bay” era also sought to explain the international
political problems of 1970’s. Liberal economists, such as Harry
Johnson (1971), saw one of the major problems in the conflict
between political forces guided by nationalism and economic
forces pressing the world to further integration. Governments and
MNCs were put into conflict, each of them trying to stress its own
interests. Liberal economists at the “Sovereignty at Bay” era thought
that the governments still dominate over the multinational economic
forces, however it was believed that the roles of the two actors
would change very soon given the growing importance of global
economic interests. There is no wonder that most of the studies at
that time regarded MNCs as the embodiment par excellence of the
liberal ideal of an interdependent world economy (Gilpin 1975: 221).
The literature of the “Sovereignty at Bay” era reveals in a more
general view a set of four interrelated aspects of the relationships
between MNCs and nation-states:
First, costs and benefits associated with the MNCs tend to be
distributed unevenly within and across the states. This concern
became the core of the “dependencia” theories elaborated mostly
by developing countries in 1970’s and 1980’s. Basically, it challenges
Vernon’s conclusions of MNCs and nation-states being “partners in
development”. According to Dependencia, accepting foreign
private investments from developed states increases economical,
technical and cultural dependency of less developed states, and
therefore, contributes to a hierarchical and exploitative world order.
The concept was further elaborated by the Marxist economist
Stephen Hymer (1970) into the concept of two rules25 through which
25 These two rules are the Rule of Increasing Firm s ize and the Rule of Uneven Development. The former explains the logics of increasing the s ize of f i rms in the development workshop – factory – national corporation – multidiv is ional corporation – multinational corporation. The latter rule deals with the tendency of international economy to produce both wealth and poverty.
28
will cause the final transfer of economic functions of the state to
MNCs.
Poynter (1985b: 25) even compares the acceptance of FDI and the
presence of MNCs in developing countries to a Trojan horse through
which the outside states can exert their influence on the host nation.
Dependencia and nationalism served as powerful psychological
factors in shaping population’s attitude to MNCs, together with
political factors common to most developing countries (like
colonialism and Marxist ideology). These two groups of inputs were
strongly influencing the overall (developing) state’s approach to
MNCs and consequently, the extent of opening the national markets
to foreign investments.
The second major concern of “Sovereignty at Bay” literature dealt
with jurisdictional asymmetry between territorial state’s control and
international network of MNCs and their affiliates. The core of this
asymmetry lies in the fact that the world economy is organized into
a single unit while international political system remains divided into
sovereign units. In other words, nation-states are constantly
struggling to increase their security and power relative to other
countries, which is in conflict with the interdependent nature of
world economy which generates absolute gains for everyone. This
constitutes an eternal challenge for the MNCs which are trying to
find means how to overcome differences of the territorially sovereign
states. The asymmetry consequently poses problem to both actors:
While the truly global MNCs do not have any global political
authority to count on (so-called “governance without
government”26), the individual states do not possess sufficient means
to fully embrace and comprehend the operations of a MNC.
26 As stated James Rosenau (1992).
29
Ball (1968: 164) even calls the political structures “archaic” and the
business structures “modern” and sees the creation of supranational
political structure as the best solution how to govern the
multinationals in the world order of those days. Since such progress
was not likely to occur, he identifies the second best solution:
“Denationalize” the MNCs through treaty-based international
business law supervised by a supranational authority.
Third, the literature was concerned about the jurisdictional conflict
and extraterritoriality.27 The base of that conflict lied in the double
personality of each MNC’s affiliate. In Vernon’s words, it is an entity
created under laws of the country in which it operates, responsive to
the sovereign that sanctions its existence. Yet at the same time, as a
unit in multinational network, each affiliate must be responsive to
the needs and strategies of the network as a whole (Vernon 1977:
93).
Finally the fourth aspect dealt with the weakening of national
control over the economy and economic actors. The multinational
enterprises have become primary agents of interdependence and
their growing importance in world system puts limits on state control
over domestic economy. The big companies organize their
economic transactions internally, not letting the nation-states
monitor and influence the internal flows of capital, intermediate
products, and other resources. The MNC’s concern is about raising its
profitability and growth while nation-states seek to include the
operations of private sector into their policy strategies how to
promote economic and social welfare of their citizens. Vernon
concludes this debate by stating that whenever the loyalty and
commitment of a substantial enterprise in the economy seems
ambiguous, tension is unavoidable (Vernon 1977: 15).
27 As discussed in chapter 3.2.
30
The lack of total control of the nation-state over the multinationals
derives from the very basic characteristics of both actors: MNCs are
mobile in their operations while nation-states are “anchored” in their
territory. This important aspect of mobility allows the multinationals
to move around countries, open and close operations based on
purely economic reasons, and not to be overconcerned about the
social impact of their decisions.28
This fourth aspect of “sovereignty at bay” literature was heavily
criticised by mercantilists who believed that the national economic
and political goals will overcome the considerations of global
economic efficiency. They argue that the world economy will soon
fragment into regional and economic blocs which will discourage
the boom of the multinationals.
To sum up the above thoughts of Raymond Vernon from the global
point of view, multinational enterprises have something to offer that
host countries badly want and that the acceptance of these
offerings generates problems of overlapping jurisdictions,
accompanied by a sense of loss of national control. (Vernon 1971:
271) He also assumes that the viewpoint of the MNCs and nation-
states can be different and sometimes contradictory since either of
the actors possess its own sources of power and means of influence
to affect the other entity.
Even though Vernon’s studies were very influential in late 70’s and
early 80’s they were also subject to academic reviews and criticism.
Apart from dependencia and mercantilist models mentioned earlier,
the “Sovereignty at Bay” literature was criticized for its reduction to
a question of interests and power. Vernon and his followers assumed
that the bargaining power was primarily on the side of the MNCs
while nation-states were left with little to bargain. This aspect has
28 The social implications of MNCs’ activities are analyzed in chapter 5.2.4.
31
also social implications because if the nation-state does not reassure
its sovereignty against the multinationals it may result in unwelcome
changes in the society – e.g. lowering standard of living or increase
of unemployment. Besides that, “Sovereignty at Bay” is also heavily
criticized for neglecting the fact that success of MNCs in their
activities towards the state was dependent on a favourable political
order.29
2.4. Globalization
Parallelly with their unprecedented growth in the “Sovereignty at
Bay” era, the multinational companies have become clearly
defined, structured and consistent with the international framework
in which they found their way how to cope with territorially defined
nation-states. Certain MNCs are still in fact national firms with a clear
centre or home country which engage in international operations
and require access to territory to function (Kobrin 2001: 193).
However, clear distinctions between “national” and “international”
came to an end with the era of globalization. There are lots of
definitions of the term globalization and which evoke some authors
warn of frequently use of this expression making it a “cliché of our
times”. Globalization transcends economics; it includes social,
cultural, and political processes which are projected in a large
“global” order; forms of social, political, and economic organization
beyond the scope of the state (Albrow 1997). Similarly to that, Hill
(2007) defines globalization as the shift toward a more integrated
and interdependent world economy that takes up multiple facets,
such as globalization of markets or globalization of production.
Globalization brought a fundamental change into the organization
of world economy – the number of actors in international system has
raised, their nature and characteristics as well as the patterns of
29 That assumption derives from the 50’s and 60’s (so-called honeymoon phase in Dunning’s (1992) words).
32
relationships between the actors have changed fundamentally. The
world has become more integrated, interconnected and
interdependent on all the levels ranging from local, national,
international to global interactions. This process has had major
impacts on the relationships between nation-states and MNCs.
The issue essential to the primary hypothesis of this thesis is if the
globalized relationships compromised the territorial sovereignty (and
the other key characteristics of nation-state) till the extent that
“Sovereignty at Bay” has become the truth. Generally, one can
distinguish two major flows in the literature dealing with globalization
which can be easily simplified by two important books titles: The
Borderless World (by Kenichi Ohmae, 1990) and The Myth of the
Global Corporation (by Doremus et el., 1998).
The first group of authors views the nation-state as an anachronism
resulting from the triumph of market forces and economic rationality.
Ohmae (1990) argues that global (stateless) firms are a natural
response to the fully integrated, borderless world economy. MNCs
have disengaged from any linkage to national origins, thus
becoming fully independent from any state control. Ownership
frameworks, decision-making processes, corporate strategies, cross-
national alliances – all of these have been deprived of (direct and
indirect) relation to any national roots. According to Ohmae, the
governments have been deprived of their traditional roles: both
economic (they are no longer managers of national economies)
and political since the MNCs have means how to circumvent
governmental restriction. Therefore, the multinational companies are
becoming true citizens of the world.
On the other side of the spectrum of viewpoints at globalization are
extremely state-centric approaches. Doremus and his colleagues
(1998) state that the position of the nation-state has been reinforced
33
because all the transnational forces, technical advancements and
economic integration have caused the convergence of state
policies. Thus, domestic factors such as national structures and
economic ideology do have powerful impact on the strategies and
operations of MNCs. Put in other words; the MNCs are seen as
products of their home economy, the national market is always
considered the primary one and the MNC’s activities are heavily
influenced by policies of home governments. The multinationals tend
to reflect economic and political interest of their home country while
the governments promote the interest of their own national firms.
These two approaches above present the extreme ends of a view on
the nation-states and MNCs in the era of globalization. There are a
number of factors that have altered this relationship and/or formed
a new dimension of their relationship which has become typical of
the globalized world.
First, deep economic integration has internalized most of the MNCs’
production and circumvent the state’s supervision over the
economic flows. Second, new advancements in technology have
forced the multinationals to coordinate their operations on a larger
scale than the biggest national markets. The enormous expenses of
research and development could be amortized only in a fully global
production and division of work which has become possible also
thanks to the modern means of communication. Third, the
multinationals have become not only mobile (as discussed in the
preceding chapter) but also more flexible and interlinked into global
networks and alliances. According to Reich (1991) the global
economy can be described as seamless web in which there are no
longer any purely national economies, companies or products. The
existing vertical integrated structures have been often replaced by
untransparent horizontally linked economic units, which are, on top
34
of that, “notoriously unstable” as Gilpin pointed out (Gilpin 2001:
299).
Fourth, the non-territorial networks have originated a new
transnational “civil” society. Multinational enterprises have emerged
as relatively autonomous transnational actors, empowered with a
private authority. They have transformed the international system
and affected the concept of sovereignty. Despite being private
actors, they are increasingly engaging in authoritative decision-
making that was previously the prerogative of sovereign states
(Cutler et al. 1999: 16).
As to the very latest development, both nation-states and MNCs are
migrating to cyberspace.
The new information era when business is done via electronic
commerce poses a serious threat to the concept of territoriality and
sovereignty as it is known nowadays. Cyberspace is characterized
by non-territorial spaces which make the actual physical location of
operations/transactions completely irrelevant. This trend conflicts the
actual definition of territoriality of nation-states – governments cease
to have the undisputed right to rule within the national borders.
Paradoxically enough, cyberspace might lead the nation-states to a
more intensive cooperation once they realize that in cyberspace
they can only assert their individual national identity if that identity is
the same as that of other nations – Hedley (2003) refers to this as a
“paradox of nationalism.” While the territorial jurisdiction was a
subject to discussion in the era of globalization, a question has been
raised if the basic idea of the nation-state defined by its borders will
be still relevant in the age of the Internet and e-commerce.
35
3. Government Still on the Throne?
Based on the historical development of the relationships between
nation-states and MNCs presented in the preceding chapter, one
can argue that the state has been already deprived of all its major
functions and the construct of sovereignty has eroded till that extent
that there is no reason to speak about the nation-state any more.
Many authors actually think in that way. Schwartz (1999: 139), for
example, assumes that national governments seem not to be losing
power but to be enthusiastically throwing it away.
It is the purpose of this chapter to discover if the “decline of the
nation-state” in the era of globalization has deprived the state of its
key attributes or if the nation-state has preserved its original
functions in the relation to the MNCs. If so, what are the actual
instruments of the state’s influence, what are means of control over
the multinational business activities and how the nation-state
positions itself as an actor in the world economic system.
3.1. Policies of the State
Having provided the basic characteristics of the State in chapter
1.2.2. we can discuss the actual activities of the State which are
shaped into the form of national policies. For the purpose of this
thesis, we can define the relationship between the outcome (policy)
and the input (politics) in Spar’s words: All national policy is the
product of domestic politics, of the struggle for power and interest
that defines a national system and creates its rules (Spar 2001: 223).
Keeping the focus of this chapter in mind, we will look into state
policies that shape and coerce the activities and behaviour of
multinational companies. There are five major policies that have
serious impact on international business which are more or less under
states’ control: Trade policy, capital controls, FDI, regulation and
antitrust policy. Thus, nation-states do possess means of influence on
36
the MNCs, however, they use them with differing intensities and for
different ends.
3.1.1. Trade Policy and Capital Control
The rules and national regulations of trade may be the most
apparent policy in the international business sphere. International
trade, by its definition, means the exchange of goods and services
across the borders whilst the “boarder-crossing” is the key aspect
that governments have always tried to govern and consequently,
shape the activities of trading firms. Apart from traditional
macroeconomic policies30 that can spill over to the international
level, the government has privileged a right to impose export
controls, pursue protectionist policies and define its overall strategic
trade policy.
Restrictive state policies towards trade are most often distinguished
between tariff and non-tariff barriers. Tariffs, defined as taxes
imposed by the governments on goods entering at its borders
(Cateora and Ghauri 2006: 40), are absolutely under state control.
They work as arbitrary and discriminatory obstacles to free trade and
trading activities of MNCs. As Hill (2007) concludes, not only are the
tariffs unambiguously pro-producer and anti-consumer but also they
reduce the overall efficiency of the world economy. They require
constant administration and supervision by state authorities which
cause serious constraints for MNCs, especially in the form of
enhanced bureaucracy. The latest development has been towards
substantial limitation of tariffs (mostly thanks to international treaties
and institutions)31, however, trade policy remains one of the most
powerful means of trade control – an obstacle to international trade
par excellence, completely in hands of nation-states.
30 Such as policies affecting demand, relative costs or labour market. 31 For example GATT or WTO. See chapter 3.4. on multinational activities of nation-states.
37
Apart from traditional tariffs, nation-states impose also various forms
of non-tariff barriers. Quotas32 and mechanical barriers to trade
belong to the oldest ones, but, under the international pressure to
remove trade barriers and eliminate quotas, nation-states have
turned to more discreet and sophisticated means (such as customs
and administrative entry procedures, standards, charges on imports,
export subsidies, voluntary export restraints, monetary barriers,
etc.).33 In principle, these barriers inflict regulative conditions that
disadvantage foreign corporations against their domestic
competitors, serving as a protector of domestic market again under
the government’s unlimited control.
In addition, certain non-tariff barriers have a clear political purpose.
So called “hard” barriers, such as embargoes and boycotts,34 put an
absolute restriction on trade across the borders, in contrast to most
of above stated non-tariff barriers which only limit exports and
imports. Embargoes and boycotts are often used for political
reasons to punish another state for some kind of wrongdoing or to
prevent another state from access to key technology and/or
resources. In both of these cases, relationship between the
government and multinational companies becomes heavily
politicized since the state uses trade to achieve its geopolitical
goals without risking a military conflict. On the other hand, absolute
restrictions on the trade tend to have negative implications not only
on MNCs and international trade, but also on domestic companies.
Nevertheless, these two barriers, when applied, remain one of the
most powerful obstacles to multinational business activities.
32 Quotas are an absolute restriction on the quantity of a specific item that can be imported (Cateora and Ghauri 2006: 41). Similarly to tariffs, they tend to increase prices. 33 A comprehensive list of frequently used non-tariff barriers can be found in A. D. Cao’s article “Nontariff Barriers to U.S. Manufactured Exports”. 34 An embargo means a government order to refuse to sell to a specific country while government boycott is an absolute restriction against purchase and imports from other country (Cateora and Ghauri 2006 or wordnet.princeton.edu/perl/webwn)
38
Other barriers work in a different way: “Soft” trade policies like
imposing standards abuse national interests, local tastes and
differences35 in order to distort free trade and cross-national
activities of MNCs. Multinational enterprises have gained support for
eliminating these obstacles in multinational arrangements and at
international authorities; however, the current practice is still very
much deflected to the state’s advantage.
nation-states have become very inventive and sophisticated in their
continuous effort of controlling or at least monitoring the trade
coming into and from their national markets. Moreover, they proved
to possess influential means of guiding the trade into desired
directions (e.g. incentives and subsidies) and promoting certain
strategic national industries. The latter can also be termed “strategic
trade policy”, an old-fashioned protectionism nudged to higher
theoretical and industrial level (Spar 2001: 213), which is pursued by
governments to protect and support their “national champions”.
These giant national firms compete mostly in the global marketplace
because the economies of scale and presence of externalities push
their operations far above the national level in order to stay
competitive.36 However, to achieve their global goals, they require
massive support from their governments, not only in the form of
domestic assistance but also by backing on the international level.
Governments do have and do use their assets and international
influence to support industries which have become part of national
pride and thus, politically very sensitive.
Apart from control over trade, the nation-state has (to certain
extent) preserved the control mechanisms of capital flows in and out
of its territory. Even though it is nowadays true mostly for developing
35 Such as “health code” for beer in Germany, Italy’s definition of pasta, etc. 36 This happens in strategic industries such as aircraft (e.g. Airbus) or semiconductors.
39
countries,37 protecting domestic economy from unforeseen changes
in the international capital markets constitutes an important
instrument in government’s hands. The state can maintain certain
controls on capital and foreign exchange in order to lessen the
impact of external capital fluctuations and shocks, even free
transfers of profits and dividends from overseas MNC’s operations
can be limited. Since the capital controls may differ in time and
according to political party/ideology in power, MNCs include these
controls into political risks analysis38 and elaborate strategies in
advance to anticipate economic losses.
3.1.2. Foreign Direct Investment Rules
Apart from trade and capital controls, the governments dispose of
other influential means of control of cross-border economic
activities. One of the most discussed one is definitely foreign direct
investment and its rules that regulate conditions of investment in the
territory of foreign states. In this aspect, it is the government which
plays the role of the “gatekeeper” – it sets the rules of entry of the
MNCs.
There are two major types of investment that are subject to
government’s regulation: outward investment when FDI flows out of
the country (home country’s MNCs invest) and inbound investment
when FDI enters the country (foreign MNCs make the investment).
Regarding the inbound investment, most countries are aware of risks
associated with letting the FDI penetrate their economies,39 but, at
the same time, they also welcome it because of its multiple benefits.
One of the soundest benefits is what Kojima refers to as tutorial role
of FDI: Inbound FDI can strengthen states’ wealth-creating 37 In 1996, 130 out of 156 countries classified by the IMF as “developing” were imposing restrictions on capital account transactions (Vernon, Wells, and Rangan 1996). 38 See chapter 5.2.3. 39 However, authors like Behrens and Picard (2007) warn of opposite examples when some forms of FDI can result in reducing economic autonomy and increasing economic dependence on the rest of the world. This shows that generalizations on FDI can be misleading and country-by-country approach must be adopted when drawing final conclusions.
40
capabilities and economic independence. Such “love-hate”
approach to FDI is typical of majority of the nation-states – FDI is
both welcomed and simultaneously restricted. For these purposes,
governments have developed different sets of regulations:
restrictive, conditional, attractive, and defensive.
Restrictive rules can take on many forms, for example formal
licensing procedures for non-domestic companies or imposing
restrictions or complete prohibition in certain strategic sectors.
Compared to that, conditional rules allow inbound FDI but on
certain conditions (naturally advantageous for the State), such as
participation in joint-venture with a domestic company or “content
laws” (obligation to purchase certain resources from domestic firms
or the state itself). In contrast to that, attractive FDI rules serve to
attract and advantage those investments that are highly desirable
(for national economy, underdeveloped regions, endangered
sectors, etc.). Despite the fact that most states are signatories of
international guidelines on national treatment,40 the governments
yet offer special subsidies and incentives (in the form of tax cuts,
access to resources and infrastructure, labour supply, etc.). Finally,
defensive rules are implemented when government seeks to
discourage certain kind of investment.41
The current attitude to FDI is a result of past experience which has
followed the similar development as the relationship between MNCs
and nation-states presented in chapter 2.1., from the initial conflict
and mistrust to foreign capital till the government’s recognition of
FDI benefits and its contribution to healthy economic growth. This
evolution can be considered as a learning process for both
governments and MNCs which has reshaped their originally extreme
40 Based on those international treaties, countries must not discriminate against foreign firm and must treat domestic and foreign companies equally. 41 For example when imports need to be decreased because of unfavourable balance of trade (as in the case of USA and Japan in late 80’s).
41
positions towards a more relaxed stance. Some governments, as
Drezner (2001) argues, go even further and voluntarily “auction off”
their sovereignty to the highest bidder, reaping great rewards in the
process. The current practice of attracting FDI by favourable policies
and generous incentives leads Drezner to conlusion that, in some
respects, it has never been so profitable to be a nation-state than in
this non-nation-state world. However, generalizations cannot be
driven without careful considerations of the major influencing
factors.
Dunning (1992) in his influential book on MNC and global economy
clearly states that the current government’s approach to FDI is a
result of the interactive relation between state’s reactions to latest
world economic development and the evolution of global strategies
of MNCs. Therefore, he offers a useful summary of policies likely to
be adopted towards MNCs activity for four different scenarios.
The first pattern called non-interventionist scenario applies to
countries which systematically encourage both inbound and
outward investments and impose minimum performance
requirements and controls. Second pattern (structural adjustment
and upgrading scenario) characterizes countries which use a
mixture of incentives and controls to attract inbound investment and
incorporate them even into micro-organizational strategies.
Countries pursuing selective investment scenario (third pattern) tend
to encourage inbound FDI only in selected sectors to assure that
such FDI is in accord with political and cultural goals. Finally,
controlled investment scenario refers to situations when both
inbound and outward investments are heavily controlled through
numerous and complicated authorization procedures.42
42 For illustration and reference, see Dunning’s (1992: 565) classification of countries into his four scenarios of 1990’s: 1st (OECD and a few Asian countries, 2nd (Japan, Taiwan and South Korea), 3rd (Latin American and sub-Saharan African countries) and 4th (India, China, some Latin-American and African states).
42
These four scenarios provide a comprehensive overlook on
government’s means of FDI control shaped upon the stage of
country’s economic development and connectedness to
international economic system. In each stage (scenario), the
government has a specific set of instruments which can be applied
in regard to the state’s general economic and political goals.
In addition to all FDI rules mentioned earlier, special attention must
be paid to regulation of two following kinds of investment: greenfield
and brownfield. The former refers to the creation of an investment
production unit; the latter denotes the acquisition of an existing
production unit (Levasseur 2002: 106).43 Regarding the greenfield
investment, the government maintains a key role in the process of
setting rules. In fact, it can regulate two major aspects of this FDI:
Conditions of entry and operating requirements. Though tactical
bargaining process, the state is able to impose many regulations
which will, in the end, shape the form, procedure and outcome of
the particular investment. In negotiations on the entry conditions,
the government can determine the degree of foreign ownership,
kinds of value-added activities in which the MNC can operate, forms
of financing of the FDI, the location of the investment and other pre-
entry conditions.
Furthermore, the government can put in writing the operating
requirements demanded or expected from the MNCs. Also, the
government can regulate the exit conditions44 and encourage the
greenfield investment with certain incentives. In practice, the
government seeks to employ all four mentioned requirements
43 The term of “brownfield investment” refers more precisely to purchases or leases existing production facilities to launch a new production activity. The paper will deal more in detail on this topic in the section on Mergers and Acquisitions (chapter 4.1.2.). 44 As Dunning (1992) suggests, the exit conditions were frequently regulated in 1960’s and 1970’s when MNCs were used as tutors bringing know-how and forced to withdraw after successful implementation). Nowadays, they are common only in selected sectors such as resource-seeking FDI.
43
simultaneously in the bargaining process in order to get the best
outcome from each inbound FDI (subject to chapter 3.3.).
3.1.3. Regulation and Antitrust Policy
The main difference between trade, capital and FDI policy and
regulation lies in the fact that regulation is mostly directed to the
domestic economy, not to transnational activities. Thus, both
domestic and foreign companies are subject to state regulation.
Governments engage in regulation in order to support state and
public interests (Bauchet 2003) and to promote a public good and
redress public ‘bad’, in other words positive and negative
externalities (Spar 2001). One must realize the fact that there are
diverse authorities in charge of the regulation on multiple levels and
in different hierarchy which, in the end, makes the field of regulation
very labyrinthine. In theory, governments should be in control of
guiding the externalities with their social and economic goals in
mind. In practice, the regulatory policy becomes part of the “pulling
and hauling” of politics, as the untransparent political processes and
procedures are often called. Consequently, the policy is facing not
only the public interest but also private interests of other actors that
are consulted or otherwise involved in the process of drafting the
rules and regulations. This situation is referred to as “regulatory
capture”.
To achieve the public interest goals, governments are equipped with
diverse policy tools such as rate regulations, price caps, health and
safety standards, wage controls, environmental reviews, etc.
Concerning the regulations of the sectors in which the MNCs are
active, the government can influence two major aspects: Entities
who are subject to regulation and the form of regulation itself.
Therefore, the foreign operations of the MNCs require substantial
amount of commercial adaptation since the level of regulation may
44
vary not only across the countries, but also inside each country in
industrial sectors, product groups, regions, etc.
The heaviest regulation imposed by government naturally covers the
areas where private forces have to be guided in order to reflect
(next to their private interests) also the socially desirable ends like
health care, clean environment or education system. Governments
continue playing the main role in protecting these areas and control
egregious excesses that the market produces. Kondo (1999) calls it a
need for social safety nets that government has to provide since
competition inherently produces winners and losers. If the
supervision is not executed well, unwelcome outcomes appear in
numerous forms. Often cited examples of MNCs activities are
phenomenons like social dumping (lowering or even violating the
labour standards and requirements) or environmental dumping
(lowering the rib for environmental responsibility of the firm).45
Apart from socially desirable goals mentioned above, the
government can impose regulations on certain sensitive sectors
because of national security. This term can be defined as the ability
of a country to protect its sovereignty of action in times of
aggressive and hostile actions by other countries (Dunning 1992:
536). The regulation can be in form of one single act46 or a
comprehensive legislation. The basic concern of the national
security is to prevent falling of strategic domestic industries into
foreign hands: Either by foreign affiliates engaging in harmful
activities to host country or by using the foreign affiliates to impair
the military efforts of the host country. In any case, the national
security argument has always been very sound in international
business area and partly because it originates in deep national
45 More on this topic in Oxelheim and Ghauri (2004). 46 Like the Omnibus Trade and Competitiveness Act of 1988 in the USA.
45
values, mentality and historical experience, it varies a lot among
countries.
One specific area which is intensively regulated is antitrust and
competition policy. This regulation is deeply embedded in the
political structure, reflects dominant ideology and therefore, is very
country-specific. The rationale behind this policy is as follows: Market
forces can occasionally produce anti-competitive outcomes which
must be controlled by antitrust law and regulation imposed by the
state in order to prevent companies from having undue control over
the markets (Baron 1993).
Like regulation, antitrust policy applies almost entirely to the
domestic market and can be used in two major ways: Either to
support state general interests such as price stability, employment,
higher growth, efficient use of national resources, etc. or to put limit
on companies which have acquired, in government’s eyes, too
much power. Thus, this form of state intervention can be used very
effectively by the governments in preventive as well as defensive
way against the market forces coming from MNCs – their activities
are therefore under constant supervision of state authorities
endowed with power to forbid, limit and review their business
activities on an ongoing basis. Antitrust policy can consequently
assume many forms: antimonopoly and excessive market
concentration, price discrimination and predatory pricing,
collusions, supply restrictions, full-line forcing, etc.
nation-states can execute their antitrust policy either in a strict or
flexible way. The former way is not very desirable by both MNCs and
open-market countries since it can create other barriers to market
entry. Opposed to that, the flexible antitrust policy should be
applied by public authorities in order to prevent the obstacles to
market entry of new competitors. Bauchet (2003) supports his
46
preference for the flexible antitrust policy by three major arguments:
First, the competition is maintained because such policy allows
creation and survival of numerous small enterprises. Second, the
structure of the market should be regarded more important than
strategic activities of strong corporations. Third, keeping borders
open to new competitors brings substantial benefits in form of
technical progress and strengthening economies of scale.
Thus, effective flexible antitrust policy helps the government to
supervise the business activities in the domestic market and
empowers the state authorities to impose limits on MNCs strategies
that could have serious effects on the national market. This way,
antitrust policy remains one of the most effective means of control in
the state’s hands over generally free business strategies of MNCs.
3.2. Extraterritoriality
In principle, combination of internal sovereignty and mutually
exclusive jurisdiction makes the national law applicable within the
state territory. But international law extends state jurisdiction outside
its territory, over the actions of its own nationals anywhere which
gives rise to the phenomenon called extraterritoriality, in short
application of state’s laws outside its territory. The principle of
territoriality, which is the basis of the post-Wesphalian system,
generally prohibits extraterritorial acts, the prosecution of foreigners
for acts committed outside of a state’s territories. However, there
are multiple examples when conflicts between two jurisdictions
appear in the international business area.
This clash of national law systems is highly relevant to MNCs
operating in more countries – it’s exactly the situation which Vernon
(1971) describes as “twin personality” of a foreign affiliate of a MNC
(being a subject to the laws of the country within which it operates
while it has to abide by the decisions of its parent company). That
47
ambiguity makes determining ‘nationality’ of the subsidiary of the
MNC quite problematic because it raises questions about whose law
should apply. Typical extraterritoriality problem arises when
subsidiary’s actions (situated in country A) are judged by national
laws of country A and parallelly, country B exercises its control over
the headquarters located in country B and feels appropriate to
apply country B’s laws. The clash of national law systems is in this
case even more complicated when the country B executes
applicable extraterritorial law.47
Based on the example above, extraterritoriality can be used (or
abused) also as a political instrument. Tsurumi (1984) points out
situations in which mainly developing countries are subject to
political intervention of other countries through their MNCs that have
set up operations in developing countries. Consequently, not only do
the home governments intervene into the activities of the
subsidiaries abroad but also they meddle into the domestic affairs of
the host country.48 Recently, there has been a considerable shift in
extraterritorial law application towards executing not only business
activities in foreign countries but also human rights abuses and
unethical behaviour.49 This development has both supporters and
opponents – supporters argue that insisting on “global” values such
as morality and human rights is a positive outcome of globalization
while opponents state that these practices of MNCs are insensible
towards cultural and social characteristics of host countries.
Nevertheless, extraterritoriality remains another powerful source of
47 Such as the USA applying extraterritorially the “Trading with the Enemy Act”. The clash of US and French legal systems appeared according the to the scenario described in the text many times, for example in Fruehauf case (1964) when a French subsidiary entered into a contract with Chinese supplier while the Act prohibited business activities with proscribed countries, China included at that time. 48 That was the case brought up mainly by developing countries in 80’s when the political interventions were regarded mainly negatively as a mean of political intervention. 49 E.g. American corporation Unocal was charged with doing business with oppressive regime in Burma which violates human rights and all U.S. companies can also be charged for bribing foreign nationals under Foreign Corrupt Practices Act.
48
government’s control over MNCs’ activities, in this case even outside
its own territory.
3.3. Government’s Bargaining Power
The opinions on government’s bargaining power differ across the
international political economy spectrum – “dependencia” authors
tend to minimize the autonomy of governments in the bargaining
process while liberal authors (like Raymond Vernon) have stressed
their growing ability to bargain with MNCs. Authors especially
reflecting developing countries’ point of view consider the
governments passive in the bargaining process while others have
been pointing out an active, critical strategic and market-
facilitating role to play by the governments. Similarly to that,
Oxelheim and Ghauri (2004) claim that state policies should be
investment creating with the aim to improve competitive power and
boost the productivity and efficiency.
Government’s position in the bargaining process has undergone
major changes in last 50 years. This progress has been following the
development of priority goals of nation-states and the appreciation
of the role which MNCs play in advancing these goals. Since 1960’s
MNCs activity in the manufacturing and service sectors has shifted
from first-time investments to the servicing of local markets to
sequential investment in pursuance of a regional or global strategy
(Dunning 1992: 549). The qualitative shift was also followed by a
change in quantity – the negative view was often a result of a
mistake by governments of inviting only one company to invest in
their country. Even though the invited country had latest technology
and up-to-date management skills, the “single invitation” practice
led the countries to miss most of the benefits of the inbound
investments.
49
All that can be easily characterized as a learning process on both
sides but governments have started to appreciate the benefits of
inbound and outward investments and also to accommodate public
goals of the nation-state to private goals of the MNCs. The general
approach to MNCs has led to a more relaxed stance, showing
appreciation to traditionally negatively viewed activities such as
allocation of cross-border innovatory capabilities. After being
subjected to major criticism, states began to realize and promote
also the benefits (thus, such investments being a “seed corn” for
economic growth and enhanced competitiveness).
Since bargaining between the governments and MNCs is by
definition an interactive process, there are some factors on the
government’s side which influence its starting position as well as the
course of the process. First, countries have the critical advantage:
access to their own territory. That includes internal markets, local
labour supplies, investment opportunities, sources of raw materials
and other resources attractive to MNCs.
In the beginning of the bargaining process itself, countries have to
present their comparative advantage. This theory of David Ricardo
explains that it makes sense for a country to specialize in the
production of those goods that it is able to produce most efficiently
and to buy the other products from countries who are more efficient
in their production. Regarding the demand, the government stresses
the size and richness50 of the market which reflects the international
disparities in the consumers’ preferences. The next step is to
demonstrate the absence of major trade barriers and the
advantage of the location, minimizing the costs of transport. Other
factors on the side of the demand include low level of political risk,
minimum fluctuations of exchange rate, etc. The supply side is
determined by the cost advantages of production; the labour
50 Richness in this case means the strong revenue per head.
50
payments must be competitive but weighed against the efficiency
and productivity.
The relative negotiation power of the governments is an important
variable in determining the mode of market entry – the state
authorities have the resources to dictate to the MNCs in which way
they wish the foreign affiliates to be founded and operate. Insisting
on joint ventures or any other shared ownership scheme can provide
governments with constant control over foreign business activities.51
Also, governments possess vast resources that can be used actively
to attract MNCs with their investments. Although the doctrine of
national treatment ensures equal treatment to both foreign and
domestic firms, governments are able to find ways how to offer
adequate incentives. Some incentives fall into a “grey” area (still
legal but questionable), however, others are apparently unfair.
Oxelheim and Ghauri (2004) list frequent behaviours of governments
in the “race” for FDI: “elbowing” out the competitor countries,
creation of frustrated governments not willing to compete with unfair
means, blaming more successful states for unfair FDI attractions, etc.
The governments in the “race” for FDI apply, among others, five
major incentives: Information advantages and agglomeration
support, subsidies and tax packages, looser interpretations of
international agreements, cyclical and geographical factors (such
as business cycles and seasonal patterns) and nationalism in the
form or home country-biased consumers. The agglomeration
support mentioned first can be explained as a conscious strategy of
a government to invest and develop a certain sector of its economy
which leads to the cast that the local expansion of a sector initiates
further growth by increasing the supply of the factors that made the
location attractive at the first place.
51 Such practices are common nowadays for example in China.
51
The most important role (regarding the topic of this paper) is played
by subsidies. Grants, tax concessions, soft loans, equity participation
and warranties are main examples of active use of incentives as
offer-specific examples.52 They are generally incompatible with the
concept of free competition under equal conditions and the
worldwide trend is to eliminate at least the most discriminatory ones.
So far, all the means we have discussed advantage governments in
the bargaining process. However, there are also inherent
disadvantages of nation-states while facing MNCs in the negotiation
process. First, as we mentioned earlier, MNCs are mobile and can
shift production from one country to another more or less easily. This,
as Korten (1995: 126) highlights in his book “When Corporations Rule
the World”, weakens the bargaining power of any given locality and
shifts the balance of power from the local human interest to global
corporate interest. He also assumes that the trend is favouring the
largest corporations which pay lower taxes and receive higher
subsidies. Thus, the localities are forced to absorb private costs to
increase private profits.
Given the fact that huge corporations attain constantly growing
bargaining power, the states sometimes prefer to engage in
cooperative/collective bargaining instead of bilateral negotiations.
Certain authors53 remind that this pattern is mostly followed by
developing countries which feel unsafe while facing big
corporations. They use bargaining methods in analogy with
management-labour negotiations in order to achieve their goals.
One of frequent examples is maximizing their tax income from MNCs
by unitary taxation54 which, however, requires a considerable power
of collective action. Secondly, collective bargaining can be used
52 More on these subsidies can be found in Oxelheim and Ghauri (2004). 53 Like Gill and Law (1989) or Tsurumi (1984). 54 Unitary taxation means the way the tax is levied on the subsidiary of the MNCs based on exacting a proportion of the global earnings of the company.
52
with success in information-sharing and monitoring of unwelcome
side-effects of FDI, for example abuse of transfer pricing techniques
in intra-firm trade.55
In this chapter we have provided major characteristics of
government’s position in the bargaining process. The means of MNCs
will be subject to chapter 4.4. and the analysis of the interaction
between nation-states and MNCs within the bargaining process will
be analyzed in chapter 5.3.2.
3.4. New Means of Control: Governments on the
Multinational Level
Governments no longer only execute policies in order to defend
their national interests but the scope of their actions has grown to a
global level. The reason for this “spill-over” has its origin in disorders
of global production systems that endanger the sustainable
development of global system as well as of separate nation-states.
Since these natural, economic, social and financial disorders
continue to have growing scale and frequent fluctuations the
international cooperation and intervention of international
authorities have become indispensable.56
Nation-states are engaging in a growing number of collaborative
actions: Alliances vary from very informal exchanges of information
and “soft” agreements (guidelines and codes) to legally binding
treaties with a common set of rules, regulations and policies towards
MNCs. As such, these legal agreements limit or even abrogate the
sovereignty of nation-states. Another classification of multinational
activities of nation-states towards MNCs is offered by Bauchet (2003)
who distinguishes between international organizations specialized in
55 For more details on intra-firm trade see chapter 4.2. 56 Interesting point was made by Bauchet (2003) in stating that states transfer part of their competences not only “up” buy also “down” towards local authorities. This decentralization of powers leads towards application of the doctrine of subsidiarity.
53
certain domain (e.g. International Labour Organization),
organizations of a broader scope (such as World Trade Organization)
and regional integration (as European Union) while each of these
kinds of cooperation dispose of specific rules, instruments of control
and degree of sovereignty limitation.
In line of what was pointed out in the first paragraph of this
subchapter, Cateora and Ghauri (2006: 46) stress out the
development of international cooperation in trade: Trade treaties
used to be negotiated on a bilateral basis, with little attention to
relationships with other countries while they tended to raise barriers
rather than extend markets and restore world trade. However, this
development and inevitability of growing global market forces gave
birth to multilateral trade agreements and international
organizations.57 These intergovernmental activities contain their own
complex sets of rules, mechanisms of enforcement and also
consultation procedures which are designed to reduce tariffs and
other discriminatory non-tariff barriers and serve as “watchdog” of
the world trade. In addition to that, these collective actions of
nation-states work as platforms for international discussion where
consensus must be sought and reached because the world trade is
not supposed to be a zero-sum game, but should contribute to the
development of each (member) state.58
The middle way of intergovernmental activities lies in “soft”
cooperation, often in a form of codes of conduct (ad hoc or based
on already existing multinational platform, for example the Code of
Conduct of the OECD59. Although such documents are not legally
binding, they constitute a very important step forward in defining
57 Such as GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization) 58 More on GATT and WTO in Spar (1999), Nicolaidis (1998) and Gopalan, Moss and Wells (1996). 59 OECD stands for Organization of Economic Co-operation and Development.
54
the rules of international trade cooperation and contribute
substantially to development of fair conduct in world trade.60
Apart from informal exchanges of information between nation-
states, their collective action serves several other purposes that
strengthen their position vis-à-vis multinational corporations. First, as
mentioned in last paragraphs of subchapter 3.3., multinational
cooperation helps nation-states strengthen their bargaining position
against MNCs and formulate unified policies towards their activities.
Second, governments can be assisted in their policies towards MNCs
by education and trainings of government policy makers in a form of
cross-country workshops on specific MNCs-related issues. Third,
multinational cooperation among governments can bring many
positive effects on the domestic economy such as price reduction,
standardization of consumer behaviour, diffusion of technology, etc.
Fourth, by communicating advantages of inward FDI and other
means of information-sharing (recently based on modern
communication technology), the liberal approach to world trade
and the importance of trade barriers limitation is spread faster and
to new audiences who were originally deprived of this source of
information due to ideology, lack of connectivity to outside world or
simply by geographic remoteness.
Finally, one must point out that engagement of governments in
multinational projects, agreements and organizations depends only
on the will of signatories and it is the basic principle of sovereignty
that foreign countries possess no means of intervention into
domestic affairs of another country. Nevertheless, the cooperation
between nation-states constitute a considerable shift in their means
of control over the business activities of MNCs in and through their
territories and there is high probability that these kinds of
cooperative interactions will continue in future on a more frequent
60 See chapter 5.1.2. on the analysis of codes of conduct role in MNCs- nation-states relationships.
55
and organized basis. This also provides evidence that government
and control over the territory as key characteristics of the nation-
states have not been surrendered substantially to the pressures of
MNCs.
4. Multinational Corporations on the Move
Having provided basic characteristics of MNCs in chapter 1.3., the
aim of this chapter is to look into the means how MNCs can
influence the nation-states and its key attributes as well as what kind
of instruments they have develop in order to do so on a continuously
bigger scale and with increasing efficiency.
The motor of MNCs’ expansion to new markets lies deeply in the
need of space for their growing operations. They are pushed to
expand due to various factors such as economy of scale, progress in
technology, volume of production, pressures from competitors,
saturation of demand in domestic markets and segmentation of
products in function of demand, etc. Thus, the multinational
corporations are constantly in search for international locations
always larger in order to develop to their full potential.
As Mucchielli (1998) points out, the company has to have a specific
advantage to exploit in the new market which cannot be fully
capitalized on from external position. Thus, the corporations can no
longer remain “outsiders”, but they have to enter new markets and
become “insiders” to achieve the maximum of their business activity.
Korten (1995: 124-125) is accurate in his conclusion that MNCs are
developing “chameleon-like” abilities to resemble insiders no matter
where they operate while moving their operations around the world
without particular reference to national borders. The truly global
companies have set a clear trend towards a “stateless corporation”
where the question of national origin of the product content has
56
become so complex that it is nearly impossible to determine it
clearly.
This chapter will provide a brief overlook of the nature of MNCs’
activities, their developing means of control over the nation-states
and also their predispositions as well as developed instruments in
effective and efficient influence on other actors in world economy
system.
4.1. Market Entry: The Choice
In the strategic development of a MNC the internationalization
constitutes a key stage and choosing the right mode of entry is one
of the most important strategic decisions of each MNC. Generally,
according to Pérard (2003), if they fail, their competitors will benefit
from the fiasco which will consequently make their second attempt
extremely difficult.61
Meier and Schier (2001) offer five principal strategic motivations that
drive the MNC’s decision to internationalize: Development of new
means of growth, better repartition of risks between countries,
answer to globalization of markets, improvement of corporation’s
competitiveness and finally access to more favourable regulatory
and institutional environments. If the corporation is motivated to
engage in overseas operations, the next key step is to decide in
which form it will proceed in the new market.
There is no wonder why this strategic decision is subject to numerous
studies.62 Determining the mode of entry is in principle a result of
comprehensive analysis of various factors which include for example
the degree of perceived risk, an estimated return on investment,
transaction costs, potential growth, firm diversification and impact
61 However, this Pérard’s conclusions are true only if the new market conditions remain the same. In reality, waiting for more favourable market entry moment with more-FDI friendly arrangements can pay off to the MNCs (such as it did to Coca Cola Co. in its re-entry to India in 1993. 62 Like Anderson and Gatignon (1999), Lee (1996) or Erramilli (1996).
57
on firm’s image. Furthermore, the MNC’s decision-makers should also
weigh more general factors such as macroeconomic (political risk
and market potential), microeconomic (company size, contract risks
and value of resources) and a number of others (knowledge of
market and international experience).
One of the most controversial factors of market entry choice is the
size of the corporation. Andreff (2003) presents econometric
analyses provided by the United Nations which clearly state that
there is no relation between the company size and the degree of
implanted overseas operations. However, other authors63 do not
share this point of view. They believe that the smaller the enterprise
is, the less probably it will engage in international activities. But other
studies (like Wagner 1995) demonstrate that the impact of company
size is decreasing due to new industries and technologies where the
actual company size does not play the very primary role.
To sum up, Meier and Schier (2001) suggest approach the decision
upon the mode of market entry from two principal sides: Firstly, the
strategic resources (financial, technical, managerial, commercial,
organisational, etc.) have to be subjected to a detailed analysis.
Then, MNCs have to weigh the market potential (growth rate, local
resources, possible extensions) against the risk associated with their
involvement in the particular market (economic, administrative,
cultural and geographic distance). Based on this two-dimension
analysis, the decision-makers will make a final conclusion on the
market entry, taking into account both market attractiveness and
managerial implications of such a step (see Exhibit 1).
Distance between existing and intended market Market
attractiveness & Managerial implications LOW HIGH
63 Such as Meier and Schier (2001) or Bauchet (2003).
58
HIGH
strategic priority with high risk of competitive intensity
progressive approach around the research of local
partners
Market
potential
LOW
non-priority decision project abandonment
Exhibit 1: Market attractiveness and Managerial implications. Source: Meier and Schier (2005): Enterprises multinationales. Stratégie, restructuration, gouvernance. Paris, Dunod (page 43).
The above analysis is tied to the choice of ownership level – in other
words, to how much control the MNC desires to possess in the newly
establishing entity. Erramilli in his article published in 1996 stresses out
the following proportion: The greater the control desired by the
parent firm over its foreign operations, the greater the degree of
subsidiary ownership it will seek (Erramilli 1996: 229).
There are several ways how to classify the growth strategies of
MNCs. Meier and Schier (2001), for example, distinguish between
internal growth modes (exports), external growth modes
(acquisitions) and conjoint growth modes (strategic alliances,
networks of MNCs). Wall and Rees (2004) all the market entry modes
“methods of internationalization” and classify them into three
categories: export-based, non-equity and equity methods. Even
though this chapter will analyze more modes of entry, this division is
very illustrative because it demonstrates clearly the origins and
nature of each of them.
4.1.1. The First Steps: Exports, Licence and Franchise
The initial market entry strategy that requires the least resources
localized in the new market, is exporting. Exports provide easy
access to overseas markets without establishing a separate legal
entity in acquired market, as Tsurumi (1984: 439) points out, it
automatically paves the quickest way toward rapid industrialization
and export competitiveness of local manufacturer. Exporting is a
favourite way for companies that wish to realize their sales abroad
59
without excessive costs of structure and capital. Mostly, this choice is
adopted by small and/or new firms wanting to go international or by
larger firms that intend to begin their international expansion with a
minimum of investment.
Export activities can assume several degrees: Direct exports allow
the company to obviate intermediaries and sell directly without the
sales force or a paid agent. While exporting indirectly, the
corporation penetrates the market through employing a third party
(a trader, export company or importer/concessionaire/distributor)
that possesses a sufficient distribution structure. So-called associated
export is the most advanced exporting form when more companies
from one country operating in interconnected sectors join their
export activities.
Relatively low costs of exporting are counterweighted with a low
control over the product distribution and a high potential of
problems occurring when dealing with the third party. However, this
stage is often regarded as transitional because when the company
starts to engage in more activities in the new markets (such as
contracting local suppliers) it becomes more efficient to change the
mode of entry (see further).
Another way to gain market entry is through licence and franchise.
The former stands for an agreement that allows one party to use an
industrial property for a specific time in exchange for payment to
the other party. This contractual arrangement is sometimes criticized
by market analysts64 since it allows the company not to produce
anything and only collect the profits. On the other hand, licensing is
often used by companies with mature products, in very competitive
markets, by small companies lacking financial and managerial
64 Such as in Korten’s study called When Corporations Rule the World (Korten 1995).
60
resources or by companies with large share of research and
development revenues.
Franchise stands on more sophisticated contractual arrangements:
One party (franchisor) allows another (franchisee) to operate an
enterprise using its trademark, logo, product line, and method of
operation in return for a fee (Hodgetts, Lufthans and Doh 2006: 266).
This concept has proven to be very adaptable to the international
business environment since the local partners are backed up by
powerful and experienced MNCs with valuable know-how and vast
managerial resources.
4.1.2. The Second Step: Fusions and Acquisitions
An enterprise can further enter a new market in a form of a fusion
(merger) or acquisition. This cross-border transaction which includes
purchase or exchange of equity involving two or more companies is
continuously on the rise both in value of the operation ($150bil in
1990 compared to $1150bil in 2000) and in proportion of total inward
FDI (88% of all 2000 incoming investment flows).65 Although these
figures have been recently on a sharp increase the fusions and
acquisitions (F&A) are not a recent phenomenon – Sandrine
Levasseur (2002) has identified five major waves since the beginning
of industrialization.66
The reason why MNCs vote for this mode of entry to new markets is
supported by several sound arguments. First, corporations are
tempted by new markets where they can obtain a significant market
share or reach a dominant position. Second, through F&A,
corporations get access to assets and resources of other companies,
especially of those of intangible nature. Third, F&A usually bring
higher profits because of the increased productivity, a bigger size of
65 Figures quoted from Levasseur (2002: 111). 66 The waves are the following: 1st (1890s), 2nd (1920s), 3rd (1960s), 4th (second half of 1980s) and finally 5th (from 1995 on).
61
the company and of the market share as well as new financial and
personnel motivations. Apart from those microeconomic reasons, the
explication of large F&A activities originates in macroeconomical
factors such as deregulation, privatization, destructuralizations of
particular sectors, liberalization of financial markets and trade. A big
proportion of fusions and acquisitions have been carried out
because separate corporations could not bear excessive costs of
technological innovations and vast expenses on research and
development without merging with other to share these expenses.
Such complex market operations as F&A can assume several forms
with particular features and specialities. The main division lies
between horizontal and vertical F&A while the former count on more
than 70% of total F&A value.67 The adjective horizontal is used for
fusions and acquisitions when competitive firms from the same
sector are acquired. Vertical F&A occur between enterprises which
are in relation of client – supplier. Recently, also companies whose
activities are not interrelated tend to merge and acquire one
another – this type is called conglomerate F&A.
There are other classifications of F&A depending on the mode of
purchase: Meier and Schier (2001) distinguish between acquistitions
by purchase of share or by exchange of share while Bauchet (2003)
draws his distinction between the F&A realized by unilateral
purchase, by cross-border actors or by reinvestments of allowances
and loans. He also stresses out that the F&A do not include only
transfers of capital but also technology and management transfers.
Because the F&A are quite an advanced mode of entry to new
markets they bring about some important changes to the MNC’s
structure and business activities which have to be reflected in their
corporate strategies. First, in the expansion phase, the corporation
67 Figure from 1999.
62
plans its offensive strategies in line with its internal and external
growth. Creating assets is essential for company’s competitiveness
and sometimes, the competitors are acquired through their shares
(in raid offer or public offer) without their consent (so-called hostile
acquisitions). In contrary to that, F&A can be effectuated through a
common accord between the absorbing and absorbed firm.
Second, MNCs cannot remain passive in their business strategies and
must intentionally develop defensive strategies in order not to be
acquired by another company. This involves continuous deep
analysis of market factors, its own resources and assets in search for
new equilibrium in constantly changing business environment.
4.1.3. The Third Step: Joint-ventures and Alliances
The internationalization process may continue to more complicated
and interactive structures such as Joint-ventures (JV) and alliances.
A joint-venture is created by an agreement under which one or
more partners from different countries own or control a business
(Hodgetts, Lufthans and Doh 2006: 263).68 This market entry is
frequently used in situations when the state is not willing to allow
foreign entities to enter its market without preserving share on
decision-making processes in the company. Thus, in principle, JV is
built on an equal access to decisions and a mutual respect to
partners’ contributions to the common business activities.
Indeed, we can distinguish between two major kinds of
contemporary JVs. First, there can be a JV between two
multinational enterprises in the same sector. Unifying competitors
might seem contradictory to the market logics at the first sight, on
the other hand, the final JV acquires control over the market share
of both its constituents. However, this does work in reality only if the
68 A joint-venture does not have to be always between companies from different countries, a domestic joint-venture can exist as well. Thus, to be more precise, we should use the term “international JV” in this paper. However, the thesis will use the term “joint-venture” in place of “international JV” since it is not the purpose of this paper to analyze domestic JVs.
63
two (previous) rivals are able to start effective cooperation and
communication through their different structures. More interestingly
for this study, there is a second type of JVs arising between the MNC
and a local company. This kind represents a real market entry mode
for a MNC that would not be allowed otherwise to engage in a new
market. Sometimes, big multinationals vote for this choice
voluntarily, however, more often it is the state regulation that
requires cooperation with domestic partner companies.69
The concept of such JVs should be, in principle, advantageous for
both sides: States can protect their interests through the local
company, retain an effective control over the foreign subsidiaries
and be involved in the decision-making processes. The MNC can, on
the contrary, substantially reduce risk of market entry and also
benefit from local partner’s relationship network, an established
distributor chain, knowledge of the local markets and its specificities
as well as from the JV itself as a strategic interest in the key
(emerging) market.
Opposed to that, joint ventures bring along many cross-cultural
problems, such as differences in management and corporate
organization, specific labour issues and so on. Also, as Tsurumi (1984:
438-439) stresses out, the legal ownership of a foreign subsidiary can
frequently be separated from the effective control of its operations.
Consequently, local entity owners of a JV become silent partners
possessing very little effective control over the operations.
The third way of classifying JVs can derive from the presence (or
absence) of the equity in the final interconnected structures. So-
called nonequity ventures are characterized by one group merely
providing service for another (e.g. a consulting firm) while in equity
ventures, both the MNC and local partner provide a share of
69 As it has recently been the case of for example India and China.
64
financial investment, technological expertise and/or managerial
expertise.
While joint ventures can be characterized as relatively stable entities
embedded in local legal systems, the alliances are much more
unstable and project-oriented cooperation patterns. They constitute,
in principle, new structures to meet current challenges of market
expansion, increase of market power and growing costs of research
and development while facing the global competition. Moreover,
they do not incorporate the whole corporations into the global
alliances but more effectively, they incorporate only a certain
division of MNC’s activities (for example technological
development) into the organic structure of an alliance.
These modern structures have been on the rise recently because of
two main reasons: The costs of research and development are
becoming so high that they need to be shared even by
competitors.70 Secondly, new means of communication allow the
multinational teams to work effectively without the necessity to be
located in the same workplace.
4.1.4. Final Steps: Wholly-owned Subsidiary and Other
Structures
The final step in MNC’s way to internationalization is to achieve the
total ownership when establishing a subsidiary in the new market.
Such a structure allows the MNC to have the total control over the
affiliate’s operations. However, opening a subsidiary in the new
market can be limited by state regulation or might be regarded in a
negative sense by local consumers or companies. Labour issues
have become really sound in this debate since subsidiaries are often
accused of “exporting jobs” overseas. That is why MNCs very rarely
70 This kind of cooperative agreements between potential or actual competitors are referred to as “strategic alliances” (Hill 2007).
65
have a realistic chance to skip the previously mentioned modes in
the process of successful entry to new markets.
Since the area of market entry modes is really complex, theoretic
models can never be absolutely comprehensive. To get a more
precise idea on how the market entry modes can differ within the
mentioned groups, check the following exhibit 2.
100% owned subsidiary
Subsidiary with majority ownership (> 50%)
Joint-venture
Subsidiary with minority ownership (< 50%)
Production share, coproduction
Concession of resources
License agreement
Management contract, technical assistance
International subcontracting
Ready-to-use factories, equipment selling
Exports
high costs of
transaction
high costs of
control
maximum
degree of integration
minimum
degree of integration
Exhibit 2: Forms of presence abroad. Source: Andreff (2003): Les multinationales globales. Paris, Découverte.(page 33)
In addition to the various kinds of market entry, the timing of
entering a new country can play a crucial role in MNC’s strategy
and further, in its performance in the new territory. A specific
example is so-called “first mover” strategy when the corporation
gets access to a new market before any other competitor. This
strategic step is usually considered very risky because no reference
to current practice and treatment of other foreign entities by the
host country can be made. On the other hand, the “first movers”, if
successful, often get a considerable competitive advantage before
any other market actors because they have already established the
most crucial relations in the market.
66
4.2. Internalization and Impact on States’ Economy
One of the most significant features of a MNC is its ability to organize
international economic transactions through internalization.71 Global
companies, in comparison with domestic firms, possess a substantial
advantage that derive from keeping multiple activities within the
same organization – factors of production such as labour,
management and technology have become mobile across borders.
That fact combined with the increasing linkages between trade and
foreign direct investment decreases the ability of national
governments to control domestic economies and achieve economy
policy objectives (Stopford and Strange 1991).
Internalizing the production processes inside the corporations results
in very little control of these actions by the governments. The fact
that MNCs are large importers and exporters has an extreme impact
on the countries’ foreign trade and balance of payments. Therefore,
major decisions of large corporations (e.g. delocalization of
production overseas) cause political implications: They modify
state’s fiscal capacities and the interpretation of balance of
payments inducing external deficits of even the biggest countries.72
Specific issues related to the internalization trend (such as intra-firm
trade and transfer pricing) will be subject to chapter 5.4.1.
Taking the opposite point of view, the internalization process of
major MNCs is recognized for its positive impacts, too. According to
Dunning (1992: 531), as MNCs may help bind together the trade and
investment relationships between nations, they perform a useful
ambassadorial act of peace. Linking countries into international
trade “clusters” is believed by liberalists to decrease the chances of
unfriendly political acts since the risk of losing welfare is regarded as
71 Internalization is one of the three pillars of OLI paradigm (see chapter 5.5.1). 72 A well-known example could be large trade deficit of the USA with China which is, according to Christian Chavagneux (2001) and many others, caused by frequent delocalization of US corporations in the Chinese economy.
67
more important than minor political discrepancies.73 Some authors
go even further in interpreting the active role of MNCs in economic
and political area. Bauchet (2003), for example, points out the
“unexpected” pressures that MNCs tend to bear upon totalitarian
regimes to impose more human work conditions and trade unions.
Consequently, workers pressurize execution of higher standards and
thus, MNCs are regarded as a source of these positive outcomes.74
4.3. The Structure of MNCs
Another aspect that MNCs have under their full control and which
significantly impacts their performance is the way how they are
internally organized. The organization is often heavily influenced by
the culture of the MNC’s home country which opens the discussions
on the firm’s “nationality”. In one of the most well-known and data-
extensive studies, Geert Hofstede (1983) concludes that managerial
attitudes and beliefs as well as the pattern of decision-making are
shaped by national culture.75
Thus, the structure as well as the decision making processes in the
corporation are very culture-specific. The problems occur when a
MNC of certain “nationality” is entering a market which is culturally
very distant from the home country culture. The general rule is as
follows: The greater the difference between host and recipient
country culture, the more problematic the adjusting process to each
other’s aspirations and needs. Certain cultures are generally more
entrepreneurship-oriented and for that reason, tend to internalize
and communicate more smoothly within the organization structure
73 However, the “spill-over” of good trade relations of interlinked economies into less probable violation of the relations by unfriendly political acts is not absolute. There have been examples when MNCs were used as instruments to aggravate countries’ relations by political chicanery (E.g. Belgian MNCs in the Congo prior to WW I, US corporations in Chile and French in Algeria in post-WW II era). 74 So-called corporate social responsibility will be discussed in chapter 5.1.2. 75 Geert Hofstede analyzed a large database of employee values scores collected by IBM between 1967 and 1973 covering more than 70 countries, from which he first used the 40 largest ones only and afterwards, he extended the analysis to 50 countries and 3 regions. His “cultural dimensions” belong to the core studies of impacts of culture in workplace and managerial processes.
68
while others encounter more culture-related problems in the
adjustment process. 76
On the other hand, the influence of MNC’s home country culture on
the recipient culture is not a single-way process. When establishing
operations in a culturally different country, the home country’s
business culture is exposed to that of the new markets and they tend
to interact with each other. The ongoing strategy of each MNC is to
find the correct balance between national responsiveness
(sensitivity to local culture) and global integration strategy.77
When analyzing the corporate structures, the term “firm’s
nationality” should not be mistaken for “firm’s residence”. Many
MNCs situate their headquarters (for various reasons) in different
countries,78 which should be reflected in inward and outbound
investment analysis accordingly (not as FDI flow to/from country of
residence but as from/to country of MNC’s nationality).
However, the reflection of culture into corporate structures has not
always been so attentive as nowadays. In one of the most ancient
MNCs structures (sometimes called “fordist”79) the production
strategy was extremely centralized which was reflected into the
organization scheme under strict headquarters’ supervision. Since
early 1970’s, the strong paternalist guidance has relieved
substantially leading the corporate organization more towards
“post-fordist” management, that allowed more consideration to
local cultural and social specificities as well as more flexible
specialization.
76 Keiretsu-enclaves (originally Japanese structures), for example, have very internalized structures based on long-lasting relations with both suppliers and retailers. 77 That is subject to chapter 5.5.3.More on this topic in Bellin and Chi (2007) or Hodgetts, Lufthans and Doh (2006). 78 Taking an example from Europe: Out of 300 top European MNCs, 86 have place of residence in London and 67 in Paris. This leads the author of this study (Céline Rozenblat 1993) to conclusion that the networks of MNCs have serious impact on the internationalization of European cities. 79 Named after Henry Ford, it stands for the productive method and consequently the socioeconomic system typified in Ford’s car plants, in which workers are regarded as links on production lines, performing specialized tasks repetitively.
69
Based on this development, current MNCs’ structures incorporate
both central headquarters providing the units with corporate global
strategies as well as guidance and relatively independent units
(subsidiaries, factories and other operations) with delegated tasks
and responsibilities within the organization system. Necessary to
point out, that these world-spread structures are able to work
effectively only thanks to modern means of communication,
however, the biggest challenge of current and future MNCs remains
in surpassing local cultural differences.
Supposing the culture is one of the major features of the nation-
state’s population it is essential to point out at this moment that the
links of population to the nation-state through the culture stand on a
much solid basis that any other form of identification with MNCs.
Although employees do identify with the corporate culture
(especially in cases of their home country’s MNC), the link with the
culture of their home nation-state is markedly stronger and as a
consequence, their cultural values are reflected into the corporate
culture (as Hofstede has demonstrated in his study mentioned
earlier). Therefore, in regard to the primary hypothesis, the nation-
state has not been deprived of its population because it is the
culture of the nation-state that impacts the culture of MNCs, not
vice versa.
4.4. Corporations’ Bargaining Power
Since bargaining is an interactive process with governments and
MNCs playing an active role with their means of control, it is time to
look closely at the instruments that corporations employ in these
negotiations. The overall bargaining power of the corporation is
determined by the access to the key factors which specific for each
negotiation. Corporations tend to place more emphasis on certain
activities (e.g. marketing, cost control, access to latest technology)
70
which they need to perform well in order to succeed. The bargaining
strength of these key activities is determined by who has control
over the resources (or skills) required for those activities. If, during
the bargaining process, the MNC proves to be in possession of these
resources/skills, they consequently become the major strengths in
company’s bargaining power in relation to nation-states.
The negotiation strength of MNCs can be also examined in terms of
relative bargaining power analysis. This point of view is quite simple:
The MNC works to maintain a bargaining power position stronger
than that of the host country. A good example arises in situations
when a MNC brings a leading edge technology that new to the
country or alternatively, when this technology would become
unavailable if the MNC’s operations were expropriated or restricted
by government regulations. Over time, this technology becomes
wide-spread in the host country and the MNC starts to lose its
bargaining power. This development coerces the corporation to
invest more into research and development because the
innovations help the MNC to maintain its strong position in relation to
the recipient the country.
Finally, there are two major factors (both mentioned in preceding
chapters) that enhance the bargaining position of MNCs facing
nation-states in the negotiation process. First, it is the ability of MNCs
to shift the production from one country to another depending on
changing economic factors. Thus, a global corporation is arranging
its global operations to produce products where the costs are
lowest, sell them where markets are more lucrative, and shift the
resulting profits where tax rates are least burdensome (Korten 1995:
126). Second, the key element in company’s bargaining power in
relation to the host country is also its size and economic
performance. It is not surprising that the economic results of some
global corporations noticeably exceed the economic strength of
71
some advanced countries.80 Thus, there is no wonder that such large
corporations are able to make the most advantageous deals with
the recipient countries (pay lower taxes, receive more subsidies,
etc.).
4.5. Note on Multinational Consortia of MNCs
Global corporations as well as nation-states (analyzed in chapter
3.4.) have discovered the advantages of cooperation and alliances
on the multinational and global level. Regarding the MNCs, the
global strategic alliances were subject to an earlier chapter.81
However, it is also important to highlight the specific cooperation
schemes which derive from the existence of immense commercial
and non-commercial economic risks associated with business
activities of certain MNCs. Giant industries operating in high-risk
sectors such as aircraft manufacturing and operation require such a
complex insurance of their risks that only consortia of insurance
companies from several countries can offer it together. Similarly to
that, Dunning (1992) points out an example of very large
infrastructure capital projects that are being wholly or partially
funded by multilateral agencies or consortia of commercial or
merchant banks. This very specific sector of MNC’s global
cooperation is worth mentioning because it proves that even the
largest global corporations are not able to source the latest huge
investment projects on an individual basis because they need giant
amounts of global capital.
80 As an example, Andreff (2003) points out that the added value of the Exxon corporation reaches the same numbers as GNP of Chile (in 2002). 81 Chapter 4.1.3.
72
5. The Patterns of Relationships Between Nation-states and
MNCs
The aim of this chapter is to provide an overall analysis of various
forms of interactions existing and arising between nation-states and
multinational corporations. Based on the two preceding two
chapters that were dealing with instruments of control that either of
these actors possess over the other, this part will provide a synthesis
of relationship patterns classified into four authentic categories:
Cooperation, confrontation, interdependence and independence.
These four subchapters are accompanied by a separate fifth part
introducing alternative classifications of relationships occurring
between MNCs and nation-states as they were analyzed by major
authors of IPE and international business studies. This part and the
four-category classification intend to summarize the wide range of
approaches towards the complex and extensive area of MNCs –
nation-states interactions.
5.1. MNCs and Nation-states as Partners (Cooperation
Patterns)
The nature and need of cooperation between nation-states and
MNCs is perfectly characterized by the following quotation of former
South African president Nelson Mandela: “Development can no
longer be regarded as the responsibility of government alone. It
requires ... partnership ... There are many ways in which the special
skills and know-how of the business community can help to achieve
development objectives.”82 This statement has not remained only a
political and economic imperative but it has been (and is being)
realized through various forms of government-corporations
cooperative activities. When beneficial to both actors, corporations
and states capitalize on each other’s features and instruments and
82 Quoted from Schwartz (1999: 138).
73
pursue the logics of globalization to a mutual benefit. In such areas,
the antagonism between nation-states and MNCs seems to be
fading away while collaboration and sharing of functions are
consolidating.
Owing to say, these positive collaborative relationships between
MNCs and nation-states refer only to a certain number of activities
occurring between these two actors. Also, the role of states and
corporations in wealth-creating processes must be conjoint in order
to achieve the desired results. Governments are supposed to
establish conditions for wealth creation while MNCs are seen as the
wealth creators. This leads Dunning to the conclusion that not only
the companies but also the countries have been increasingly
behaving as strategic oligopolists, but in order to succeed, their
actions should reflect each other’s activities, instruments but also
interests and objectives.
On the other hand, even though the cooperation between
governments and corporations is successfully established, it does not
necessarily reflect the broader public interest. For example,
protecting domestic firms from international competitors by imposing
non-tariff barriers not only raises the final costs for the consumers but
also shelters the domestic companies from the winds of structural
changes.83 Or, although the countries employ strategic trade policy
to the public “good”, its administration in reality might cause many
struggles in terms of bureaucracy, lack of transparency and higher
costs as the consequence.
Another aspect which deserves to be highlighted in this introductory
part of the Cooperation chapter is the number and nature of actors
who are entering cooperative arrangements between nation-states
and MNCs. In the today’s globalized world the affairs of sovereign
83 More on this aspect in Rugman and Verbeke (1990).
74
states are interfered not only by the global companies but also by
newly emerging actors (e.g. NGOs84) whose intervention is appraised
by international community. The business-government-NGO system
of setting norms has begun to look less like a tidy flowchart and
more like a pot of soup (Swartz 1999: 141). Even though NGOs tend
to criticize much more than appraise current MNCs’ activities in the
world, they can also provide positive support to companies who
help them realize their objectives. In addition to that, NGOs can ally
with governments and thus, even increase pressure on some MNCs’
activities, especially if these constraints are against public interest
(e.g. exploiting the environment).85
Following this brief introduction the collaborative patterns of
relationships between nation-states and MNCs are analyzed. In order
to present a comprehensive but also comprehensible analysis, the
cooperation patters have been divided in three major categories:
Cooperation in the economic area and development, in the social
field and in the political and cultural sphere. However, being aware
of the fact that some activities could be classified into multiple
categories, references to these spill-overs will be made accordingly
in the text. The purpose of this analysis is not to mention all the
possible cooperative interactions between nation-states and MNCs,
but to classify the major patterns into comprehensible groups which
should, in the end, offer a more structured look at this extensive and
complex area.
5.1.1. Cooperation in the Economic Area and Development
Even though liberal political economists are not able to show direct
causation between MNCs’ activities in the host country and its
economic growth they argue that the presence of these
84 NGOs stands for Non-governmental organizations. 85 This was the case, for example, of the Shell corporation that was forced by the coalition of NGOs and some countries to abandon its projects of oil platforms in the open sea.
75
multinationals do raise efficiency and consequently, increase the
economic growth. If governments pursue active and positive policy
towards FDI, MNCs include these markets in the analysis of locations
for the potential expansion, evaluate their political and economic
risks and opportunities. As a consequence, the direct investment
from abroad is more likely to occur. As Gill and Law (1989: 203)
argue success brings success, with the agglomeration economies
being realized as attractive “growth poles”. In other words, if the
government realizes the value and growth possibility in opening the
market to FDI and actively executes and implements such a liberal
policy, the economic growth of the country becomes a mutual
target of both the country leaders and the MNCs’ management.
The similar point is made by Dunning (1992) when he claims that
private institutions (MNCs) as well as the democratically elected
ones should aim for economic and social welfare of their citizens.
MNCs may be able to affect government’s objectives and the ease
or difficulty with which the government implements policies to reach
those targets. In the more economic point of view, citizens of the
state are in fact consumers of the company’s products and the goal
of MNCs is to satisfy their needs. However, what Ohmae (1990) calls
the “service for consumers” does not only remain on the national
level but exceeds the borders of national markets. Thus, the
multinational companies are truly servants of the demand of
consumers around the world. If the goals of MNCs and nation-states
are unified, the chances of satisfying consumers’ (and citizens’)
needs are even higher.
The cooperation pattern can also be found in more specific areas of
national economies, for example in the balance of payment.
Although no generally accepted conclusion has been reached on
the ultimate effect of MNCs on the host country’s balance of
payment, it is believed that such enterprises probably contribute to
76
a surplus rather than a deficit in the host country. Regarding the
home country, MNCs can work with their home governments in order
to improve the balance of payments if it is beneficial for both actors.
The government can ask the corporations to limit their new outward
FDI in developed countries, to increase the amount of FDI financed
by borrowing abroad and to increase the return of earnings.86
This kind of cooperation between the home country and “its” MNCs
is quite frequent but not always regarded positively by other
countries. Especially when the countries use the corporations to
support their own strategies in certain countries – Bauchet (2003)
compares this generally unwelcome role of MNCs to the one of
legions of the Ancient Rome: The MNC’s home country uses the
corporations as a channel of influence in other countries.
But more often, the relationship between the state and giant
domestic companies assumes the form of protection and privilege of
so-called national champions.87 Such companies, originally domestic
which turned into multinational corporations during their strategic
development, have retained strong influence channels to impact
their government’s decision-making processes or, sometimes, even
retained the state capital in their assets. In return, these companies
receive from their government strong support in various forms, e.g.
protection of capital against raids of foreign capital or even
tolerance of their legal monopoly.
However, generally, the government should not draw a thick line
between domestic corporations and foreign affiliates – it ought to
play an active, critical strategic and market-facilitating role to
ensure to both kinds of business entities the same chance to
upgrade their location-bound assets. One predisposition to this
approach is FDI-positive policy. Out of many possible advantages of
86 This kind of policy was pursued for example by the US government in 1960’s. 87 For example, France has several big national champions, such as Gaz de France or Air France.
77
the open-market strategy, the following impacts are the most sound:
Spill-over of technology and management skills, capital flows with no
debt-servicing attached, new domestic employment and additional
production capacity. These arguments have persuaded many
governments with originally more negative attitude to FDI to adopt a
more FDI-friendly approach. According to United Nations
Conference on Trade and Development (UNCTAD) and its World
Investment Report from 2001, out of 1185 modifications of national
regimes regulating foreign direct investment 95 % were investment-
facilitating.
But allowing the foreign investment to enter the nation-state’s
territory does not have to automatically cause a complete loss of
control of the affiliate’s business activities. As indicated in chapter
4.1.3., some countries are keen on preserving a considerable control
over MNCs’ subsidiaries in insisting on joint ventures. In this case,
both sides are constrained to cooperate no matter how difficult the
cross-cultural communication can be. On the other hand,
international JVs help to create more formal relationships including
sharing costs and profits of such an entity (e.g. flow of resources,
sharing paying fees and dividends, exporting).
Concerning the cooperation patterns between MNCs and nation-
states in the development area, most of them include the same
advantages as those listed in positive FDI outcomes, i.e. transfer of
technology, management skills and know-how. This developmental
aspect is especially sound for less-developed countries which can
source the key elements to economic development from the private
sector and not necessarily from the public resources. But, by skilful
bargaining with MNCs, all the countries can benefit especially from
FDI coming to the industrial sector or to a geographic location
where the outside capital is needed for further development.
Conditioned reinvestment of foreign affiliate’s earnings in the
78
negotiated sector or a location can help both sides: The MNC profits
from enhanced infrastructure, labour education, healthy
environment, etc. and the government does not have to reallocate
all the needed financial resources to the impacted region or
industrial sector from the state budget.
5.1.2. Cooperation in the Social Area
Most of the economic collaborative patterns between MNCs and
nation-states analyzed in the preceding chapter have also a social
impact. In terms of positive and desired outcomes, the countries are
attracted by the MNCs’ investment because their operations
opening in the host country generate new employment. Depending
on corporation’s core activity, it can look for high-skilled labour or
cheap workforce and direct its search for the suitable country and
location accordingly. Nevertheless, all newly created jobs generate
income for tax contributions for the state budget and thus,
constitute a major advantage of receiving inbound investments.
Apart from partial social and economic contributions to the
country’s development, MNCs strive to be “good citizens” and
recently have started establishing strong commitment to so-called
corporate social responsibility (CSR). The idea of CRS has changed
considerably over last decade – Gordon Brown, current UK Prime
Minister, assumes that CSR goes far beyond the old philanthropy of
the past – donating money to good causes at the end of the
financial year – and is instead an all year round responsibility that
companies accept for the environment around them, for the best
working practices, for their engagement in their local communities
and for their recognition that brand names depend not only on
quality, price and uniqueness but on how, cumulatively, they
interact with companies’ workforce, community and environment.88
88 Quoted from Government update on CSR , www.csr.gov.uk.
79
Thus, multinationals are engaging in areas which used to be fully
under governmental control with no major private sector input.
This progress reflects current trends in global consumers’ priorities
and the way how they perceive the corporation in a broader sense –
not only the final products but also the image of the company and
its activities going beyond the production itself.89
The need of corporate responsible conduct towards socially-
sensitive areas has also been reflected in the development of
written norms of company’s desired behaviour. These codes of
conduct enumerate essential guidelines of internationally
acceptable behaviour which is expected from MNCs (e.g. careful
adherence to local law, respect for local customs, willingness to
train local workers, support of local social projects, ploughing back
proportion of local profits, and engage in local R&D activities).
Current codes of conduct can be general or specific depending on
which body, corporation or international organization is issuing
them.90 Naturally, these codes are not legally binding and
adherence to them depends on the company’s will. Nevertheless,
the same applies to these codes of conduct as to the CSR, the
difference is in the light in which the MNC is presented to final
consumers as well as host country citizens and authorities.
5.1.3. Cooperation in the Political and Cultural Area
Most of the cases discussed in the two preceding chapters
(economic and social cooperation) do have serious political impact
because these areas are generally very politically-sensitive topics.
Economic growth, FDI-attractiveness, employment creation vs.
unemployment, labour education programmes, CSR – all these areas
89 As an example, the US corporation Hill’s Pet Nutrition Inc., producing specialty channel pet food, engages in a range of socially-responsible activities such as providing food for pet shelters, co-financing guide dog trainings or sending pet food to rescue dogs working in areas affected by various natural disasters. All these activities are part of widely-defined CSR of this company. 90 While UNCTAD code addresses mainly the issues surrounding the transfer of technology and WHO health-related matters, for example OECD has developed more comprehensive and general guidelines for MNCs (in 1976).
80
mean a significant input in the political arena. However, it is
necessary to point out at this moment that the priorities and
particularly policies towards MNCs and FDI may vary across the
political spectrum. But once a deal with a foreign corporation
(including given subsidies, e.g. tax holidays) is made very little can
be changed apart from enactment. This “lock up” system raises
questions of political accountability and transparence of the
bargaining processes.
Apart from that, MNCs engage more or less (directly or indirectly) in
political processes. Through various forms of lobbying activities, they
seek to find channels which would best communicate their interests
to the decision-makers, corresponding institutions and authorities
endowed with decision-making power. Depending on each
particular activity, the extent of organization of these interests
varies. However, assuming that lobbying is only a one-way process
emanating from MNCs would be incorrect. The decision-making
authorities also require input from private sector and they need to
select which organized interests will be given the attention in each
particular case.
Regarding the cooperation patterns in culture and ideology, the
relationships between nation-states and MNCs are heavily
undermined by the cultural and ideological consonance between
these two. As it was mentioned in chapter 4.3., the corporate
organization as well as managerial attitudes is extremely culture-
specific. Thus, the cooperation between MNCs and a culturally close
country will be more effective and less-demanding on cultural
trainings. However, with growing initiatives such as codes of
conduct, the respect to the local culture is a precondition to a
successful implementation of a MNC’s affiliate if located in a
culturally very distant country/region or even in multicultural settings.
As Kondo (1999) argues the cultural diversity and the interplay
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between the various strands of it are the source of dynamic
evolution of cooperative practices between nation-states and
MNCs.
5.2. MNCs and Nation-states as Adversaries (Confrontation
Patterns)
While some of the new cooperation patterns summarized in the
preceding chapter have been subject to the international political
analysis mostly recently, the conflicting forces between nation-states
and MNCs were predicted and analyzed a lot earlier.91 Harry
Johnson (1971), the paragon of liberalism, referred to the economic
problems of 1970’s and identified the fundamental problem of future
in the conflict between the political forces of nationalism and the
economic forces pressing for world integration.92 Although in
Johnson’s era the balance of power appeared to be more on the
government’s side, it was predicted that the shift towards
predominance of the economic forces over the political ones will
occur.
Nowadays, the debate is cannot be so straightforward to state
clearly where the balance of power between nation-states and
MNCs lies generally. The activities of MNCs have become very
diverse and the analysis has to be made in each area separately,
taking into account all other factors and interfering actors in the
globalization era. On the other hand, the conflicting areas in the
MNCs – nation-states relationships do exist and take on various forms
that are worth analyzing. The purpose of this “Confrontation”
chapter is therefore to show the major areas where interests,
activities and strategies of states and corporation cross.
91 Mostly in 1970’s – this era is also connected to the “Confrontation phase” mentioned in chapter 2.1. which was characterized by ongoing conflicts between the two actors. 92 More on this topic in Gilpin (1975) or Johnson (1971).
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Blake and Walters stated in 1976 three major sources of conflict
between nation-states and MNCs, which are (with minor
amendments) still valid: First, the MNC is a foreign entity that
behaves in a fashion which can be regarded unusual and different
by the host country. Second, the corporation can be perceived as
an enterprise associated with a foreign country which could
(possibly) exert its influence93 through this affiliate located overseas.
Third, the MNC is an international entity able to take advantage of
economic interdependencies among states without itself being
subject to the (universal legally binding) rules and regulation issued
and supervised by an international authority.94
More recently, some authors see the conflicts arising between
nation-states and MNCs as a result of antagonism between the
system of global politics and globalization tendencies. As McInnes
(1993) points out, sovereign states jealously guard their autonomy
while seeking better rules to govern their inevitable conflicts.
Globalization, on the contrary, works as a transnational force that
bursts the seams of nation-states since they are increasingly helpless
to deal with problems that can only be handled by the world acting
as one.
The conflicting areas between MNCs and nation-states differ
substantially depending on their geographic location, cultural and
ideological distance, mode of market entry, managerial approach
and also on the type of the corporation. MNCs in extractive
industries tend to get into conflict with the recipient countries more
often because of accusation of “stealing” natural resources and
exploiting local economy (establishing no linkages to local
communities, exporting products and not processing them locally,
93 The influence in this sense should be interpreted in a broad sense – i.e. not only political influence but also cultural and social flow of changes and innovation. This could be an example of McDonald’s which is frequently criticized mainly for its “cultural” intervention into social and cultural habits of people in different countries. More in Watson (2006). 94 You can find the original three sources of conflict in Blake and Walters (1976: 97).
83
etc.). Less confrontation is generally faced by manufacturing
corporations that are much more integrated in host-state economies
and societies.95
In order to present a summary of conflicting areas between MNCs
and nation-states, this subchapter is divided into four general
categories: Confrontation in general legal and market control,
Confrontation in market stability and other economic policies,
Confrontation in forms of intervention, Confrontation in nationalism
and social policies. Being aware of the fact that all the possible
confrontation areas cannot be fully listed, this classification should
be regarded as selective, showing only the key conflicting areas.
5.2.1. Confrontation in General Legal and Market Control
The core of the confrontation between nation-states and MNCs lies
in the fact that states are defined by their territory in which they
exert their sovereignty while business relations of MNCs transcend
the frontiers without being seriously limited by states’ territories. This
key difference between the two actors has been already analyzed
in chapters 3 and 4, however, regarding the topic of this part, it is
present as a latent conflict in any activity that states and MNCs are
pursuing.
This feature gives raise to other related issues. One of them is the
problem of a “double personality” of the affiliate of a MNC located
overseas. This entity has to abide by the law of the host country as
well as by the internal instructions. This issue is interrelated with the
phenomenon of extraterritoriality analyzed in chapter 3.2. At this
moment it is essential to point out that the duality of foreign
subsidiaries together with application of extraterritorial acts has
always been at the root of many of the MNC-state conflicts. Thus,
the multinational corporations serve as vehicles facilitating the
95 More on these thoughts in Blake and Walters (1976).
84
extraterritorial reach of one state into the domain of another – as
conduits or transmission belts through which the power of one
sovereign state is projected into the territory of another (Vernon
1977: 177).
This explanation evokes the question of the role of MNCs in a
conflicting situation between the investing and recipient country. As
it has been argued in several preceding chapters that MNCs could
be used as a channel of influence of the home country into the host
country, serving as a passive intermediary.
Apart from extraterritoriality, the MNC is the primary agent of
interdependence occurring in the international economic system
and its increasing importance put serious limits on the state control
of the domestic economy. Factors such as internalization (chapter
4.2.), intra-firm trade and transfer-pricing hide the actual
international transactions and thus, decrease the ability of the
national government to control its economy. By lacking this
supervision over market activities, the government interests get into
serious conflict with MNC’s goals: The government needs the
information about the market transactions in order to achieve its
economic policy objectives while the MNCs seek to internalize their
transactions as much as possible in order to save extra costs,
especially those designated for tax contributions.
This pattern deals with the processes different for MNCs and nation-
states in terms of market control. There is no reason to assume that
MNCs and nation-states have always conflicting objectives,
however, there is no reason to claim that they will be identical or
even substantially overlapping. Although they play different roles in
the market, the governments have been increasingly relying on the
private sector to accomplish national economic objectives. Kobrin
(2001) argues that the growing emergence and presence of MNCs in
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domestic economies has resulted in a higher probability of a
divergence between state and firm objectives.
5.2.2. Confrontation in Market Stability and Other Economic
Policies
The government sets its economic policy targets in order to achieve
a continuous stability in the national market. But MNCs are endowed
with the capacity to make environments of the world markets an
object of competition which consequently contributes to natural
instability of these markets (Bauchet 2003).
Multinational corporations possess financial resources to expand to
new markets as well as to penetrate new domains of business
activities in the current markets. These enterprises can dominate
considerable proportions of national markets, sometimes they even
become oligopolies or monopolies. By acquiring such a favourable
position in the market the MNCs gain the capacity to innovate more
quickly than competitors which, in the end, assure them the position
of market leaders. Naturally, governments try to preclude such
monopolistic and oligopolistic tendencies by imposing special
antitrust laws and regulation (chapter 3.1.3). The clash of interests is,
thus, clear – corporations want to become as large as possible to
dominate their competitors while the governments seek to prevent
such attempts by imposing more or less effective “breaks” to these
dominance tendencies.
These continuous strategies of MNCs with the aim to become bigger
and more competitive may lead to conclusion that the multinational
enterprises reduce efficiency and stifle economy growth.96 By
reducing competition MNCs are be able to limit their own
96 This is in direct opposition to opinions demonstrated in chapter 5.1.1. where it was argued that presence of MNCs in the market raise market efficiency and promote growth. These antagonisms in the international political economy show the diverse spectrum of opinion on the MNCs’ activities because in reality examples of both situations can be found. For more details on these discussions check Spero (1990).
86
production, maintain artificially high prices and consequently,
decrease efficiency. Also, the national growth can be hindered by
absorbing the local capital instead of generating a new one, by
applying inappropriate technology and/or by employing foreign
managers. Again, such situations are against governments’ interests
and need to be prevented by effective antitrust regulation.
In addition to the market stability, the government gets into conflict
with MNCs in several other economic policies. One of the most
important policies is state’s approach to inbound FDI and
corresponding rules and regulation (discussed in chapter 3.1.2.).
Dunning (1992) finds two major ways in which inbound FDI may
reduce economic autonomy of the recipient country. First, FDI
coming to the country provides resources (such as managerial skills
or technology) that can be cut off at any time. This may happen
especially in case of acquisitions when the domestic entity can be
driven out of business by foreign affiliates. Second, MNCs do not
always allocate their resources from foreign affiliates in the best
interest of the host country.
But while judging these controversial situations, other factors have to
be taken into account – mainly the effect of the particular
investment. If the FDI replaces imports, it generally lessens the
dependence. However, if it replaces domestic investment, it
probably reduces autonomy of the national economy. Nevertheless,
if the FDI contributes to the strengthening of the recipient economy,
even the partial conflicts can be mastered by general positive
contribution to the health of the economy.
Another specific example of conflict can be demonstrated in the
area of exportation. Some countries impose export restrictions on
their home corporations producing sensitive technology because
disseminating such technological advancements (especially in the
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military industry) may be in contradiction to government’s interest to
protect national security.
There are further conflicting issues between MNCs and nation-states
that evoke a deeper association to international economic conflicts
between the host and home country transmitted through MNCs. One
of the most significant ones is the case of taxation and transfer
pricing. Chapter 3.3. on bargaining power has demonstrated how
tax breaks and similar investment incentives can be used to
compete for the desired FDI with other countries. Also, through the
central control of pricing, MNCs are able to take profits to the
countries with lowest taxes and thus, avoid tax contributions in
countries of production or markets of the final consumption of the
product. These practices of MNCs are in a direct conflict with
nation-state’s interest to generate profits and tax business activities
that take place in its territory.
On top of that, the list of (potential or real) conflicts is expanding to
new areas with the growing number of MNCs’ activities. Previously
discussed securities legislation, information disclosure and
accounting procedures, norms of corporate conduct (e.g. attitudes
to bribery), employment practices in racist or authoritarian regimes
(including issues like child labour) raise the conflicting areas to new
horizons.
5.2.3. Confrontation in Forms of Intervention
Multinational enterprises enter international as well as other
countries’ political environments which pose risks to corporate
strategies because of their natural variation and unpredictability.
The unwanted and unwelcome involvement of governments in the
business domain of MNCs has been traditionally grouped under the
term political risk which can be defined as the likelihood that a
business’ foreign investment will be constrained by a host
88
government’s policy (Hodgetts, Lufthans and Doh 2006: 295). MNCs
seek to preclude such conflicts by the effective political risk analysis;
however, the probability of crisis situations can never be totally
avoided (Moran: 1998).
By closely reviewing the economic and political environment as well
as the activities of major interest groups with crucial influence on
decision-making processes in the government,97 MNCs have to be
constantly aware of the current development to reveal possible
changes in advance. Based on Poynter’s (1985b) factors, they
should elaborate the political risk analysis addressing the changes in
decision-making process, i.e. changes in the interest groups, in their
preferences and also in their relative power.
Multinational corporations can consequently evaluate such political
risks in several ways. One is through macro political risk analysis
which focuses on major political decisions that are likely to affect all
business conducted in the country. Compared to that, MNCs can
look more closely into government’s policies and actions that are
directed to selected sectors of the economy or against specific
foreign businesses (micro political risk analysis).98 But sometimes it is
extremely difficult for the MNCs to predict where the future conflict
will come from, which, consequently, requires the preparation and
risk evaluation process to offer flexible solutions.
Nevertheless, the major constraints can be grouped under the term
“intervention” with two major variations: Increasing governments’
the share of the MNCs’ benefits can be executed either through
total replacement of the foreign entity (MNC) in the affiliate’s
operations or by sharing the affiliate’s benefits and keeping partial
97 Poynter (1985b) suggests four major interest groups within each country with such an influence: the ruling political party, domestic businessmen, non-ruling political groups and other potential leaders and finally the domestic managers. 98 To provide examples, imposing government’s restriction on foreign exchange transaction affects all industries (addressed by macro political risk analysis) while industry regulation, taxes in specific types of business activities and restrictive local laws are sector-specific (addressed by micro political risk analysis).
89
presence of the MNC. Poynter (1985b) includes into the first type of
intervention the following cases: expropriation, nationalization,
domestication, forced sale and abandonment of the subsidiary. The
examples of the “sharing” variation could be government-enforced
JVs, domestic public shareholders, local product or component
sourcing, product distribution through a domestic firm, hiring quotas
etc.
It is evident that all the conflicting situations above vary substantially
in their seriousness due to the degree of deprivation of the
ownership rights and control over the assets. The most serious
situation affecting the MNCs abroad is a confiscation when the
property is seized by the government without any compensation. In
case of expropriation, only limited reimbursement is made in
contrast to the domestication when the affiliate is gradually
transferred under government’s control and foreign management
becomes limited. The “sharing” interventions do pose a serious
threat to affiliate’s independence; however, they affect mainly the
business relations, not the ownership and management patterns.
Apart from the traditional interventions, MNCs can also face other
kinds of risks that endanger their activities and presence in host
countries. MNCs have to react flexibly to economic risks such as
newly imposed exchange restriction, tax and price controls, import
restrictions or occurring labour problems. In addition to that, MNCs’
business activities might become victims of international political
sanctions such as boycotts and embargoes,99 which could
paradoxically be inflicted by the corporation’s home country.
Obviously enough, the political risks are specific for each country
but also for each corporation. Although certain countries tend to be
99 See chapter 3.1.1.
90
more risky100, some companies especially in extractive, agricultural or
infrastructural industries are more vulnerable to government’s
interventions and large companies are more likely to be targets, the
generalizations are difficult to make and misleading to be behaved
upon. For that reason, each MNC reviews and evaluates
continuously its markets and their political as well as economic
development. As a strategic response, the corporation can avoid
the most risky areas, cover such risks under government and/or
private insurance, or create strategic JVs etc.
Finally, it is essential to point out that there has been a considerable
development in political risk analysis. Modern communication and
information technology has penetrated even in the most remote
markets and provide valuable sources of information for the business
entities. Thus, the affiliates’ bargaining power and political
behaviour of major actors have become much more controllable
and MNCs can now more easily establish, organize and operate
their assets to reduce the likelihood of the emergence of the
conflicting situations between them and the nation-states.
5.2.4. Confrontation in Nationalism and Social Policies
In the age of overcoming the traditional tariffs and quotas (chapter
3.1.1.) governments have been coming up with various non-tariff
barriers to limit the flow of imported products. One of the most
sophisticated barriers to imports has proven to be the effective
promotion of domestic products through campaigns organized
centrally by governments.101 Playing on deeply rooted nationalistic
feelings is a provocative and conflict-creating alternative that
makes enhancing global as well as regional integration crack at a
100 Some well-known periodics regularly rank countries by risk associated with doing business in their territory. For example, in 2004, the Economist ranked as top three risky states in the world Iraq, Argentina and Angola (The Economist, May 29, 2004). 101 Well-known examples include “Buy British” campaign promoting purchase of products made in Britain (started in 1970’s but has been vivid until now). Similar effect is transmitted by the “Czech Made” stickers and awards used in the Czech Republic for the same purpose.
91
rapid pace (Wang and Wang 2007). In this battle for consumers,
MNCs are left with very little choice of alternative behaviours. They
might seek to gain the image of the national manufacturer by using
local resources and customize their products according to local
tastes and preferences. In short, they should become more
nationally-responsive and less global.102
Regarding the social policies, the main contradiction between
nation-states and MNCs arises from the difference in goals of these
two actors. Huntington (1968) sets the ground of this debate by
concluding that MNCs have their own interests which may or may
not be closely related to the interest of any or all nations in which
they are resident. On the other hand, MNCs are expected to fulfil a
continuously expanding range of diverse public goals for host
countries. In spite of more or less recent initiatives towards greater
CSR the private goals of MNCs are naturally expected to dominate
corporation’s strategies and activities, or at least are concurrently
weighed and reconsidered against the public “good”.
Among all the social conflicts between nation-states and MNCs, the
labour issues seem to be one of the soundest. The economy of scale,
easy transfer of production and exploiting local labour has made
MNCs a frequent target of criticism. Multinational corporations
employ a large number of workforce in different legal, social and
cultural settings all over the world, which generates various problems
arising from the nature of the employment relationship. As Rugman
and Collison (2006) argue most MNCs use a combination of
centralization and decentralization in managing their workforce,
with some decision being made at headquarters and other being
handles by managers on-site. This situation may, however, lead to
numerous conflicting situations.
102 More on this debate in chapter 5.5.3.
92
Also, because MNCs possess operations in multiple countries, the
employment conditions, salaries, working hours and work legislation
is often subject to comparison. Longer working hours, unequal
salaries between masculine and feminine employees, child labour,
unanticipated discharge of employees, discouraging labour unions
and collective bargaining – these are the major conflicting areas for
which, owing to say, the countries themselves are often criticized.
Blake and Walters (1976) found one of the major reasons in
bifurcation of the national economy and the society which allows
MNCs to attract scarce factors of production in the host country,
including qualified employees. This high skilled labour, often much
better remunerated than other citizens, becomes more linked to the
global economic system and thus, the gap between their lifestyle
and other citizens’ untouched by MNC’s activities widens. This raises
chances for internal social conflict within the nation.
The conflict in the labour field can also arise from the fact that
MNCs usually diffuse technology. Although this contribution is
generally positively regarded, in this situation MNCs cause an
accelerated obsolescence of traditional jobs that become too
costly in comparison with technological advancement and
consequently, result in waves of redundancy of unskilled personnel.
However, serious conflicts also arise when labour issues are
insensitively used in bargaining processes by MNCs. Threatening with
closing of operations and moving them to a less costly regions have
become common but still criticized tactics of MNCs.
Not only does the host country have issues with MNCs in the labour
area but also the home country sometimes raises complaints on
certain implications of opening operations abroad. While the home
MNC employs more and more workers overseas, it consequently
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“exports” domestic jobs which creates tensions in the homeland.103 In
a broader sense, global corporations are blamed for international
migrations and creating of socially insufficient work
agglomerations.104
Apart from other conflicting areas in the social sector105
environmental issues have also been given large public attention.
Similarly to other social issues mentioned earlier, the private goals of
cheap production are weighed against public goals of preserving
clean environment (Strange 1997). MNCs are forced to sacrifice a
part of their immediate rentability to long-term goals embedded in
governmental programmes of sustainable development. Outcomes
of bargaining processes as well as adherence to international
environmental regulation106 seek to prevent or at least reduce
environmental struggles between nation-states and MNCs.107
5.3. MNCs and Nation-states as Dependent Actors
(Interdependence
Patterns)
MNCs and nation-states are absolutely different actors pursuing their
own goals with own strategies. Apart from situations analyzed above
when their interests are complementing or oppositely conflicting one
another one can identify other examples when activities of states
and large corporations are interdependent on each other.
103 The recent trend of this kind (not only in the USA) is cal led offshoring – substituting foreign for domestic labour. 104 For example creation of large production complexes near borders (so-cal led maquiladoras named after such facil i t ies in Mexico near the US frontiers). More on this and s imilar issues in Rozenblat’s article (1993), 105 Such as confl icts aris ing from social ly insensit ive introduction of new products (such as Nestlé’s scandal of implanting Infant formula, a substitute of breast milk, in developing countr ies in 1977 which due to low r isk-awareness and poor hygienic conditions caused death of several thousands of infants in the Third world. 106 One of the most effective ways of regulation has become the system of pol luter-payer. However, holding global corporations l iable for environmental degradation is st i l l very problematic because the effects can surface years after the MNCs leave the country or location. 107 For more details on confl icts between MNCs and Nation-states in the environmental areas refer to Moser (1998), Haufler (2000) or Robbins (2001).
94
Formally, as Debora L. Spar (2001: 207) analyzes, in the interaction
between the government and multinational corporations runs in two
directions: Nation-states erect policies that affect firm’s ability to
trade and invest across borders; and the actions of trading and
investing firms affect the political climate of the states in which they
do business. The nature of these interactions is interactive and
changing over time while both key actors (nation-states and MNCs)
are operating simultaneously in a number of arenas – both domestic
and international pursuing their specific goals.
Summarizing the interdependent relationships between nation-states
and MNCs is a very complex task which can be classified in a
number of ways. In order to stay both clear and comprehensive, this
essay will divide such interactions in three major groups: Finance
and taxes causing interdependence, Interdependence in
bargaining process and finally Interdependence in form of networks
and alliances.
5.3.1. Finance and Taxes Causing Interdependence
The Spar’s thought mentioned two paragraphs above characterizes
not only the general interaction between nation-states and MNCs
but also can be used for further elaboration of a specific kind of
interdependence in the financial and tax area. MNCs, according to
Dunning (1992: 528) are the primary repositories of the capital,
technology and organization capabilities necessary to promote the
economic welfare of societies.
The governments – besides playing a critical role in influencing such
enterprises and utilizing their assets – redirect resources away from
the generators of wealth towards non-wealth-creating activities.
These vary substantially across the whole spectrum: At one end,
government provides resources for various social benefits for citizens,
on the other hand the state money flows to infrastructure,
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telecommunications, assistance to small firms and R&D or vocational
and tertiary education. Somewhere in between, expenditures on
health, education, environment, law and order create another
major expense for the government.
Many of these government-financed activities are primarily paid by
direct or indirect taxes, to which the corporate sector generally
contributes a major share. Simultaneously, the majority of the non-
wealth-creating activities provide resources for the corporate
growth and sustainable development (qualified workforce, good law
enforcement, stable political environment, reliable infrastructure
and communication channels, etc.).
Governments wish to continue the practice of income redistribution
to the extent that the most highly taxed citizens and firms cannot
evade taxation, as Wolf (2001) argues. In fact, the challenge for the
government is to identify location-specific benefits (such as income
redistribution or welfare spending) because, if found and
communicated to taxpayers, they are likely be quite willing to pay
from several reasons: They identify with the beneficiaries, feel moral
obligation to the poor, or simply are unable to evade or avoid those
taxes without relocating physically outside of the jurisdiction. Finding
and then retaining the balance in this kind of interaction between
MNCs (paying taxes) and the nation-states (redistributing resources)
remains the challenge of each individual case.
5.3.2. Interdependence in the Bargaining Process
The bargaining process as analyzed in chapters 3.3. and 4.4. is by its
nature an interactive procedure in which MNCs and nation-states try
to find a common agreement while pursuing and defending their
own interests and strategies. The two actors also possess different
sources of bargaining power: While the government acts as a
“regulator” which can impose both incentives and restrictions on the
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negotiating enterprise, the MNC has specific advantages108 which
are wanted by the government. This confronting scheme (which is
also interdependent, based on the supply-demand model) is then
followed by partial bargaining process phases – such as in
determining the mode of entry and ownership patterns: The
government’s aim is to negotiate such a mode of entry that
preserves little MNC’s control over the affiliate, which, in the end
allows to transfer the technology and know-how into the host
country. On the other hand, the MNC seeks to negotiate a high
control over the affiliate for the corporate structure in order to
strengthen internal corporate coherence, dominate the market and
preserve their intellectual property rights.
The main factors playing role in shaping the bargaining power and
the level and direction of interactions are the following: Motivations
of the government to attire FDI, motivation of the MNC to enter the
new market, level of competition, government restrictions, need of
local resources, need of financial resources and economic and
political risks in the host country (Pérard 2003).
Apart from these factors, there are other elements that might shape
the interdependence of nation-states and MNCs in the bargaining
process. Goodman’s six dimensions (1987) are valid even nowadays:
First, the identity of the initiator is crucial in setting the scene and
starting negotiations. Second, there might be more actors on either
side of the bargaining (so-called collective bargaining).109 Third,
permanence of the relationship also plays its role and affects
significantly the offered terms and conditions from both sides.
Fourth, non-revenue contributions to the host government might be
another difficult conclusion to draw in the negotiations. Fifth, both
MNCs and governments calculate the costs and prices of the
108 See chapter 4.4. 109 Analyzed in detail in chapter 3.4.
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company’s engagement in a new market and it is worth pointing out
that their calculations follow mostly opposite interests and therefore,
will differ substantially. Finally, the sixth Goodman’s dimension is the
division of profits resulting from the relationship which has to be
agreed between complete financial transparency (desired by the
government) and absolute internal profit division patterns (aimed by
the MNCs).
Thus, all these points are subject to more or less complicated
international negotiations in which other individual and
psychological factors can also play a role (e.g. experience of the
negotiators, cultural distance between the host country and MNC’s
country of origin, negotiation tactics and strategies).
5.3.3. Interdependence in Form of Networks and Alliances
The interdependence has recently deepened due to large increase
in the networked and relational structures of MNCs and of the world
economy. It is no longer easy (for any actor) to clearly distinguish
between “domestic” and “international” but naturally this kind of
development is more in favour of the multinational enterprises than
the territorially defined nation-states.
Quick development in the scale of technology is one of the primary
drivers of a major change of MNC’s organizations: The corporations
have modified their hierarchical (fordist) structures towards
networked alliances while many of which are not based on equity
patterns. This dramatic change has reflected similar shifts in the
whole international business environment: A transition from
standardized mass production to flexible production, from vertically
integrated, large scale organizations to disaggregation of the value
chain and horizontally reworked economic units (Kobrin 2001: 195).
These changes have made MNCs adopt new organization schemes
sometimes known as “glocalization”. The centre of the MNC
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identifies responsibilities of each affiliate to match the global goals
and communicates them to the lower divisions through the global
networking system. Sometimes, the strategy for certain regions
changes substantially so it is necessary to relocate the affiliate or
redefine its responsibilities – Andreff (2003) describes this process as
global switching. In case the headquarters decide to concentrate
certain functions (e.g. R&D, finance, etc.) into one or several
affiliates, this can be described as global focusing. It is important to
note that these changes happen within the existing structure of the
MNC which has to be apparently very flexible to bear these more or
less sudden changes.
That is why the current global corporations do not keep the
hierarchical structure but elaborate flexible networking structures. As
Yvon Gattaz110 summarizes the next world company will not be a
tower but a network of medium enterprises of 100 and 3000
employees connected by information technologies in real time. The
networks are already starting to be very diffuse and relational rather
than hierarchical, more short-term than long-term oriented because
they are often based on a project basis. As mentioned earlier,
alliances and networks are typical of specific industries that have
generally very high expenses on research and development that
have to be shared among more actors in order to provide desired
results.
The challenge of the alliances and networks is not only between the
participating MNCs but also for the governments. Some states
require investors to share ownership and control and consequently,
in these cases the state companies or the government authorities
become parts of the global alliances and networks. They become a
part of interdependent and interconnected global structures and
must cooperate with other partners within the scope of alliance
110 In Bauchet (2003: 89).
99
agreement. Hodgetts, Lufthans and Doh (2006) especially alert to
situations when the governments are reluctant to permit the alliance
to terminate or they find more subtle ways of making the foreign
partners stay in their territory (e.g. through blocking the repatriation
of the foreign partners’ investments). These issues should be
addressed in the initial agreement to prevent possible intentional
misinterpretation of the agreement by the host country government.
To sum up, the geography of current global alliances is very
comparable to the presence of FDI which reflects the fact that they
are mostly composed of MNCs and their affiliates. Although the
primary goal of these structures is in line with economy of scale and
current production patters, they might have some side effects, too.
As Sandrine Levasseur (2002) points out these networked structures
can contribute to the integration of economies.111
5.4. MNCs and Nation-states as Autonomous Actors
(Independence Patterns)
The fourth dimension in the relationship between MNCs and nation-
states is their mutual independence and autonomy. There are many
situations when nation-states follow their own policies which are
independent from MNC’s scope, interests and strategies. But,
regarding the topic of this study, more interesting issues are
presented by situations when global corporations pursue their
strategies independently from the home or host country, regardless
of government policies or “public good”.
Dunning (1992) in his famous study draws up a conclusion that the
degree of dependence between nation-states and MNCs depends
on the country’s level of economic self-sufficiency. In other words,
the more economically self-sufficient the country is the more
111 In her article, she states the example of the integration of markets in Central and Eastern Europe which happened partly because of inward FDI and networked MNC structures.
100
defensive approach towards FDI it adopts. However, this general
rule has proven to be right especially in those cases when short-time
gains from inward investments are sacrificed so that the greater
degree of technological and economic autonomy can be achieved
in a long-run. 112 But most of the time the dependency issue has to
be regarded for each specific case separately. As Dunning (1992:
532) continues the tolerance for inward direct investment varies
according to its perceived economic merits, on the one hand, and
on the relative importance of such investment in the economy as
well as the openness of the economy to trade and investment, on
the other.
Apart from the level of dependence, the structure of dependence
also plays an important role. Diversity in dependence is generally
preferable to specialization in the dependence ties between MNCs
and nation-states. Achieving a desirable diversity in the inward FDI
coming to the country might be especially challenging for two
groups of countries: Firstly for those who are geographically close to
a state emanating a lot of outward investments (dependence on a
strong neighbour) and secondly to such countries whose
specialization is a result of historical development (e.g. from colonial
or occupation times).113
From the analysis of the relationships between nation-states and
MNCs one can highlight two major areas in which the two actors act
autonomously on each other: The first subgroup covers the
internalized processes in the corporate structures that are pursued
independently on the state’s will or control. The other subgroup
112 E.g. in post World War II era in Japan or South Korea where the governments disallowed most FDI because they preferred to enhance the country’s independency on outside capital and resources, and therefore strengthen its own resources and technological as well as economic capabilities. 113 To provide examples: The first scenario is characteristic for Canada receiving a large amount of US investments while the second scheme is typical of ex-UK, French, Belgian and Dutch colonial territories who are aiming at diversifying the geographical or industrial composition of the FDI coming to their country.
101
includes autonomy in financial and monetary issues while this part
quite specific for the multinational banks as a subgroup of MNCs.
Finally, the issue of dependency vs. independency between nation-
states and MNCs is subject to so-called “dependencia” theories (see
chapter 2.2.). These theories mainly supported by developing
countries tend to highlight the fact that the wealth-creating
activities and the direction of economies of developing countries
are under a heavy influence of MNCs while this imbalance is
intensified by the fear of losing political sovereignty and cultural
identity from the countries’ side.
5.4.1. Autonomy Through Internalization
A large scale of autonomy and independence between nation-
states and MNCs is achieved through the process of internalization
(analyzed in detail in chapter 4.2.) when substantial part of
corporate business is done within the corporate structure and
outside any control from states’ side. One of the most common (and
still increasing) way of internalization occurs through the trade
among subsidiaries of the same corporations – in short, intrafirm
trade. This phenomenon has been increasing significantly during last
30 years up to the current level which corresponds to one third of all
world trade (Andreff 2003, Chavagneux 2001).
Although the exchanges of intrafirm trade have become a natural
part of MNCs’ business operations worldwide, nation-states have not
been successful in monitoring and controlling these transactions.
Moreover, these internal exchanges have changed the meaning of
exports and imports and proven to have a significant effect on the
balance of payments of both countries in question. Trade surplus or
deficit of “exporting” and “importing” countries is being created
independently on their policies and efforts of control because the
transaction stay internalized inside the corporate structures.
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MNCs are reluctant to share information on intrafirm trade with the
host nation-state(s) because they are actively using such
transactions to reduce their costs. Global companies establish
special prices (so-called transfer prices) for the internal transactions
between the subsidiaries. These prices are set up independently
from the competition and as such, do not correspond to the prices
in the world market.114
The reason behind these internalized activities is simple:
Corporations try to allocate most of their earnings and taxable
income to the countries with lower tax rates, and thus further reduce
their costs. In order to achieve so, they employ transfer-pricing
techniques such as overpricing or underpricing of materials,
components, goods, equipment and loans based on their location.
MNCs organize cross-border transfers of products in all its stages,
including intermediate products, product parts to assemble as well
as almost completed goods where only very little is left to finalize the
product. The last option is the most questionable because the
location of the final product assembly may be completely different
from the country where most of the value-added operations were
made and therefore, the country is deprived of its tax incomes
which it would normally be entitled to.
MNCs make use of their internal structures to act independently on
countries’ control. Even though some countries seek to establish a
monitoring and information-exchanging system on the intrafirm
transaction within multinational cooperation schemes, their efforts so
far have not been effective enough to change the current trend of
increasing internalization of MNC’s production.
114 In fact, transfer prices differ significantly from world market price levels. Based on Andreff’s (2003) estimations, the difference between the internal and world market prices reach high ratios. For example, for pharmaceutical industry the coefficient is 155 % , for electronics 60% and caoutchouc 40%. For more on transfer pricing, refer to Elliott and Emmanuel (2000).
103
5.4.2. Autonomy in Monetary Issues
The times when monetary policy was a privilege of the nation-state
changed after the World War II and the foundation of global
financial organizations (World Bank and International Monetary
Fund). Since then, banks have started opening their affiliates
overseas, have become a specific type of MNCs (multinational
banks) and consequently, this process has led to the creation of
global exchange rate markets. These private global corporations
operate nowadays on 24/7 basis in the interbank and international
financial markets which have occurred as a result of bank
deregulation and removal of barriers between countries.
Nowadays, the multinational banks operate on the global financial
markets with their own goals and strategies which are different from
those of the countries. The global financial corporations operate in
capital markets in the environment of instant liquidity mobility, mix of
short-term and long-term operations as well as direct and indirect
dealings. Thus, they are able to operate totally independently from
the states, sometimes even posing threats to state monetary policies
while engaging in exchange rate speculations.115
In addition to that, floating exchange rates have created extreme
currency instability, which in turn has created an enormous mass of
“world money” which imposes new and more severe restraints on
government. This money has no existence outside the global
economy and its main money markets and, at the same time, it is
not being created by economic activity such as FDI, production,
consumption, or trade. However, it is created primarily by currency
trading. Therefore, the “world money” fits none of the traditional
115 Bull and baisse speculations can seriously undermine currency stability. Recent examples can include currency speculation on Mexican peso in 1994, Malaysian ringgits in 1997 or Brazilian reals in early 1999.
104
definitions of money.116 As Drucker (1997) stresses out, this money is
totally anonymous and virtual rather than real.
5.5. MNCs – Nation-states relationships: The Synthesis
Having provided the basic classification of the nature of
relationships between MNCs and nation-states into four different
categories, it is time now to present alternative approaches to this
area in order to offer as a complex picture as possible. This final
subchapter of the summarizing part of this study will introduce four
major alternative (synthesizing) theories and models of the
relationships existing and arising between nation-states and MNCs.
Consequently, this final part should complement this analysis to
provide a holistic point of view on these state-business relations.
5.5.1. Dunning’s Schematic and Bargaining Model
John H. Dunning in his well-known study from 1992 called The
Multinational Enterprise and the Global Economy presents two
analytical frameworks for examination and evaluation of the main
relationships occurring between nation-states and multinational
corporations. His schemes are based on the research of Lecraw and
Morrison (1991) but extended by incorporating the home country.
The first model is called the Schematic framework (or OLI
paradigm117). It is essentially static and describes the situation
between a MNC and nation-states as a given moment of time and
within a particular world environment. Based on the O-advantages
(O stands for ownership) of MNCs and L-advantages (L is
abbreviation of locational) of countries, it elaborates the set of eight
116 Standard definitions of money include: Standard of measurement, storage of value and medium of exchange. 117 OLI paradigm was introduced by Dunning in 1970’s and apart from O-advantages and L-advantages (elaborated later from Lecraw and Morrison’s model) this model included also the third set of advantages (I-advantages) of MNCs which originate in MNCs’ ability to internalize their international activities including production and thus, further reduce costs independently from the countries’ control. More on this is Meier and Schier (2001).
105
components which precede some course of action of a country
towards the MNCs (see exhibit 3).
(II)
Ownership advantages
Constraints
Opportunity sets
Goals
Assumptions
(III)
Strategies
Organizational structure
Decision-taking
mechanisms
MNC Host & Home
country
Value Creation
(VI)
Bargaining/
negotiation
Outcome &
Performance
(VII)Evaluation &
reactive
behaviour
(VIII)
Evaluation &
reactive
behaviour
(VIII)
World economic environment
(I)
(IV)
Locational advantages
Constraints
Opportunity sets
Goals
Assumptions
(V)
Policies
Incentive systems
Administrative systems
(II)
Ownership advantages
Constraints
Opportunity sets
Goals
Assumptions
(III)
Strategies
Organizational structure
Decision-taking
mechanisms
MNC Host & Home
country
Value Creation
(VI)
Bargaining/
negotiation
Outcome &
Performance
(VII)Evaluation &
reactive
behaviour
(VIII)
Evaluation &
reactive
behaviour
(VIII)
World economic environment
(I)
(IV)
Locational advantages
Constraints
Opportunity sets
Goals
Assumptions
(V)
Policies
Incentive systems
Administrative systems
(IV)
Locational advantages
Constraints
Opportunity sets
Goals
Assumptions
(V)
Policies
Incentive systems
Administrative systems
Exhibit 3: MNC-home/host country relationship. Source: Dunning (1992): Multinational Enterprises and the Global Economy. Reading, Addison-Wesley (page 550).
The process is as follows: The relationship is taking place within a
given world economic environment (I). The MNC possesses O-
specific advantages (ownership advantages and constraints)
reflected in its goals, opportunity sets and organizational structures
and will pursue specific strategies to meet its goals (II & III). Similarly
to that, the nation-state has L-specific advantages (locational
advantages and constraints), which according to state’s goals and
opportunity sets, will lead it to implement certain policies and
systems (IV & V). The juxtaposition between the O-advantages of
MNCs ad L-advantages of nation-states is potentially of economic
value to both sides (VI). Therefore, the actors can engage in
bargaining process and other negotiations while the final agreement
(VII) will result from their negotiating strengths and weaknesses. The
outcome of this process will affect the final form of the MNC’s
activity as well as the structure and content of the actions taken by
the government (VIII).
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The other model analyzed by Dunning is called the Bargaining
model. It offers a more dynamic approach to the relationship
between nation-states and MNCs. It is essential to highlight the fact
that these interactions arise only when an economic rent is over and
above than the anticipated opportunity cost of the O-specific
advantages of the MNC activity and the anticipated opportunity
cost of the L-advantages of the host countries, is earned or thought
to be earned (Dunning 1992: 531). Otherwise, the bargaining process
will not occur.
Similarly to the Schematic framework, this Bargaining model is based
on the O-advantages of MNCs and L-advantages of the countries
(see exhibit 4 below). However, these components are not static as
in the previous example, but become relative when the actors enter
the bargaining process: The value of opportunity costs and the
perceived assessment of the L-advantages of the countries are
weighed against the O-advantages of the MNCs. In other words, the
MNC is in a strong position when its opportunity costs are low while
the host country government values high when the MNCs contribute
to the state economic and social goals.
Ownership
advantages
Strategies
Opportunity sets
Organizational &
decision-taking
structures
MNC
Reserve
position
Alternatives:
Other countries
Other modes
Home country
World economic environment
Host country
Alternatives:
Other MNCs
Depackaging
Domestic firms
Locational
advantages
Policies &
incentive systems
Administrative
systems
Reserve
position
Ownership
advantages
Strategies
Opportunity sets
Organizational &
decision-taking
structures
MNC
Reserve
position
Alternatives:
Other countries
Other modes
Home country
World economic environment
Host country
Alternatives:
Other MNCs
Depackaging
Domestic firms
Locational
advantages
Policies &
incentive systems
Administrative
systems
Reserve
position
Exhibit 4: MNCs and host countries – a bargaining framework. Source: Dunning (1992): Multinational Enterprises and the Global Economy. Reading, Addison-Wesley (page 552).
107
Furthermore, there are factors on each side that play a major role in
this interactive process: nation-states can enhance their negotiation
position by highlighting their competitive advantage while MNCs
may stress out the unique character or their O-advantages. The
outcome is also heavily affected by the negotiation abilities of both
actors as well as by the choice of alternative courses of action. Thus,
the final activities on both sides resulting from the bargaining
process will reflect the relative bargaining powers of each actor as
well as the circumstances of the negotiation process.
5.5.2. Consistency Between MNCs’ and Nation-states’ Goals
Having introduced the general outline of interactions between
MNCs and nation-states in Dunning’s models, let’s have a closer look
at the goals of these two actors and the level of their consistency
(as presented in Rugman and Verbeke’s study in 2001). This model
can be worked out based on the following preconditions: The MNC
has a clearly defined nationality and a centralized, hierarchical
organizational structure118 and the nation-state has different goals
when in host and home country position.
Significant number of the international economic models of the
relationships between nation-states and MNCs derive from the
analysis of the goal consistency of these two actors. By assuming
that the goals between the MNC and the home country as well as
between the MNC and the host country can be conflicting or
complementary there are four main possibilities arising from this
analysis (see exhibit 5):
118 See chapter 4.3. for discussion on MNC’s structure and nationality.
108
Conflict Complement
Conflict
1 3Complement
2 4
HOST : Consistency between
MNC goals and Host country goalsHOME: Consistency between
MNC goals and Home country goals
Exhibit 5: The consistency between MNC and home and host government goals. Source: Rugman and Verbeke (2001): Global corporate strategy and trade policy. Oxford, Routledge. (page 823).
Quadrant 1 includes interactions between MNCs and both home
and host countries which are driven by goal conflict. This reflects the
pressures between micro-efficiency-driven activities of MNCs and
the macro-efficiency or distributional goals of governments. The
opposite situation, when the goals of MNCs and both host and home
governments are in accord, is placed in quadrant 4. When the goals
of MNCs and their home country are in consonance while the
objectives of MNCs and the host country differ (quadrant 2) the
corporations will face a more demanding market entry negotiations
or might be denied access to the host country completely.
Quadrant 3 characterizes situations when the goals of MNCs and
host country coincide while there is a conflict between MNCs’ and
their home country objective. This situation might lead to
“denationalizing” of the MNCs up to the degree when the firms
become truly global without any major linkage to their country of
origin.
5.5.3. Global Integration vs. National Responsiveness
One of the core debates in the area of relationships between MNCs
and nation-states has been for a long time devoted to the correct
109
balance between the MNC’s ability to be both “global” and “local”.
As most of the studies119 conclude, the guidelines can hardly be
universal because the reflection of company’s goals and strategies
as well as country’s characteristics has to be taken into account.
In order to provide a framework for this discussion, one main line
divides the complex spectrum into two major approaches: Global
interaction vs. national responsiveness. The first area is characterized
by unified production and distribution systems on the worldwide
basis while the other refers to the need to reflect differences in
segmented regional markets and to respond to different national
standards and regulations imposed by autonomous governments.
Based on this division, the international management studies120 work
with a model that reflects the compliance with one or both
tendencies (global vs. nationally responsive) and also their level. See
the exhibit 6 which represents author’s perception on this area.
Multi-domestic [polycentr ic]
Transnational [geocentr ic]
Inter national [ethnocentr ic]
Global [regiocentr ic]
National Responsiveness
Global Integration
Exhibit 6: Global integration vs. national responsiveness in MNCs’ strategies and
organization
There are four kinds of strategies which MNCs can follow based on
their characteristics, goals and objectives: First, if MNCs possess core
competencies that domestic companies lack, they are able to
119 E.g. Inkpen and Ramaswamy (2007), Hodgetts, Lufthans and Doh (2006) or Meier and Schier (2001). 120 E.g. Hodgetts, Lufthans and Doh (2006) or Deresky (2007).
110
pursue strategies low both on global integration and national
responsiveness (so-called international approach).121 Second, multi-
domestic approach which is demanding on national responsiveness
but not that much on globalization, is frequently adopted by
companies which must be differentiated through emphasizing their
local adaptation. Third, the truly worldwide companies pursue global
strategies which try to integrate local productions as much as
possible in the centralized models. Finally, the latest effort from
global corporations has been made towards the transnational
strategies because these are built upon both global integration and
local responsiveness. This approach remains the most challenging of
all since the MNCs are facing contradictory demands from their
economy of scale and country-specific production.122
A similar four-dimension approach on the global vs. nationally
responsive line can be adopted towards the relations between the
MNC’s centre and its affiliates in diverse countries (Meier and Schier
2001).123 A multinational pursuing the ethnocentric approach
emphasizes the culture of the corporation’s home country,
centralizes the principal authority and diffuse the home country’s
cultural values in the overseas operations. If the MNC follows the
polycentric paradigm, its strategic decisions are defined based on
the cultures of diverse host countries and the affiliates are endowed
with a considerable amount of autonomy. Similarly to the global
approach described above, the corporation can pursue a
regiocentric leadership towards its affiliates – compromising the
economy of scale of global production and organization with the
local responsiveness and respect to cultural differences. Finally, the
translational companies tend to follow geocentric pattern in their
121 Examples of MNCs pursuing international strategy could include truly global companies with worldwide differentiation such as McDonald’s, Walmart or Microsoft. 122 More precisely, the production can be in fact country-specific, market-specific or region-specific. 123 The approaches reflecting the debate of global integration vs. national responsiveness in corporate structure are a part of exhibit 6 (in square brackets).
111
organizational schemes since both the affiliates and the corporate
centre are seen as equal parts of the corporate network structures.
These two synthesizing approaches towards the relationship
between nation-states and MNCs show the diverse spectrum of how
much the local differences of countries and regions are reflected
into MNC’s strategy and/or organization. The purpose of such
analysis is not normative (stating what is desirable and what is not)
but mostly descriptive since such points of view help to set important
division lines in the very complex area of MNCs. The particular
approach selected by the MNC towards its organization and
decision-making processes derive not only from company’s history,
management attitudes and corporate culture but also from the
culture of the home country of the MNC itself.
5.5.4. General Techniques and Strategies of MNCs Towards
Nation-states
The multinational corporations can employ several techniques
towards the nation-states which help to shape the relationships
between them and the host country. There are three major stages of
corporate involvement in host country’s issues that can be adopted
by the MNC depending on its intentions and general business
strategies in the particular territories.
First, the MNC can pursue integrative techniques and thus, help its
overseas operations become a part of the host country’s
infrastructure. The most common examples of integrative techniques
include the following two groups: Firstly, developing and improving
relations with the political sector (host government and other local
political groups) as well as with own workforce (effective local-
management relations, hiring local managers). Secondly, the MNC is
integrating through local sourcing (engaging domestic suppliers,
subcontractors and research & development). Following this strategy
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of being “less foreign” and more “domestic” also, according to
Hodgetts, Lufthans and Doh (2006), makes the foreign corporation
more unlikely to be the target of the host government action (e.g.
expropriation).124
However, the MNC can pursue completely opposite strategy and
employ more protective and defensive techniques which are aimed
at discouraging the host government from too much interference
into the corporate operations. Such techniques include as little
integration as possible into local structures through minimum local
manufacturing, not much of the local qualified personnel, sourcing
capital from foreign banks as well as diversifying production among
a number of countries.125
Finally, certain MNCs tend to engage in the host country’s activities
and employ very proactive strategies in social and political sectors.
Through participating in political lobbying, campaign financing,
seeking advocacy, engaging in more formal public relations, public
affairs activities and other political interventions the companies seek
to shape and influence political decisions prior to their impact on
the corporation. Large corporations possess sufficient resources to
constitute an individual powerful organized interest group; however,
even competitive companies tend to join their activities and
bargaining skills in order to influence the decisions affecting their
field of industry towards a development favourable to their
corporate interests.126
124 See chapter 5.2.3 for more details on the intervention. Typically, corporation manufacturing low or stable technology tend to follow integrative strategies since their operations require minimum innovation and relatively unsophisticated technology. 125 Mostly dynamic and high-technology MNCs (e.g. computer companies) limit their local performance and integration in FDI-receiving countries on a minimum level and tend to behave more defensively. 126 More on corporation lobbying in Cadot (1997) or Sabani, Ginebri and Gioacchino (2004).
113
6. Conclusion
The nature of the relationships between nation-states and MNCs still
remains a very up-to-date topic in both academic and popular
debates although this issue has been subject to research and studies
for several decades. The challenge of the current debate lies in the
changing nature of the two key actors in the light of increasing
globalization, influenced by fast progress in communication
technologies and other consequent worldwide changes. Have the
nation-states detained any efficient means of control over the
globally active MNCs? Or have the global corporations managed to
deprive nation-states of their traditional functions? Do the nation-
states have any future possibility to strengthen their position in the
global economic system? Or will the MNCs “rule the world”
regardless of territorial boundaries defined by the “anachronistic”
nation-states? Are nation-states and MNCs able to cooperate in
certain issues or are they always in antagonistic positions pursuing
incompatible private and public interests?
This thesis analyzed the above stated questions and sought to
provide answers to quite a complex area of the relationships
between MNCs and nation-states.
The current position of MNCs is a result of development over several
centuries; however, the corporations have attained most of their
current power during the last several decades in the process of
economic liberalization and growing globalization. Global
corporations possess key features that nation-states lack by their
definition: They are mobile, driven by purely private, economic
interests and in their expansion not limited by territorial boundaries.
Their internal structures allow them to define business strategies,
organize their production and corporate structure as well as to
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engage in business cooperation without any external supervision,
need of approval or revelations. The latest development of
information, communication and transport technologies have
enabled the MNC’s business operations to operate on a truly global
level, pursuing global strategies and economy of scale. The world
has become one single global marketplace where only global
corporations are competitive.
But how do these MNCs affect the key characteristics of the nation-
states? Regarding the territory, the process of MNCs’ expansion is
characterized by the need of space. The more and more liberalized
environment of the international economic system has made the
decision on the market entry a matter of internal strategy of MNCs
while the importance is given to competitive advantage of the
recipient state as well as to the overall strategy of the corporation.
Once established, the new operation becomes a part of the internal
corporate structure where national boundaries play a very limited
role.
Similar “acquiring” procedure occurs with the state’s population:
From the MNC’s point of view, the populations of the recipient
countries are regarded simply as consumers with corporately
defined target groups regardless of the borders.127 The part of
population that is employed by MNCs enters into legal relations with
the multinational. Thus, corporate strategic decisions affect the
workforce and also related labour and social issues, especially in
situations when the local conditions change considerably (e.g.
labour becomes more costly) and the MNC can move its operations
to locations with more favourable factors. On top of that, managers
(as a part of population) become mobile within the corporate
structures so the link to their home country is weakened substantially.
127 The national responsiveness can be reflected in approaches reaching from international (ethnocentric] to transnational (geocentric) as analyzed in chapter 5.5.3.
115
Regarding the government as the third key attribute of the nation-
state, the influence of MNCs on governmental activities is apparent
both in the relative (in bargaining process) and absolute (MNC as a
citizen) way. Once the MNC gains access to a new country, it
becomes an active actor not only in the domestic economic sector
but also in the political, social and cultural sphere. Either through
direct channels of influence (e.g. lobby) or through indirect ways
(CSR) it obtains influence on major state policies.
All these arguments about the territory, population and government
support the verdict that governments “have left room” while MNCs
stayed at the table alone (Schwartz 1999). Through their
organizational and policy concerns which are, in contrast to nation-
states, truly global, global corporations put serious pressure on
territory, population and government as the key components of
nation-states.
In the process of approving vs. disapproving the primary hypothesis
these arguments have been weighed against the current position of
nation-states, particularly the government.
The territory demarcated by state borders defines the nation-state
not only as a sovereign unit in the international political system but
also as a market in the economic sense. As such, it becomes a
corporations’ target in their expansion. In other words, MNCs require
access to territory to function. Besides that, the territory constitutes
the main advantage that nation-state possesses facing the
corporations in the bargaining process (Dunning’s locational
advantages). On top of that, through the concept of
extraterritoriality, nation-states are able to execute their influence
and power outside of their own territory. These conclusions prove
that nation-states preserve a considerable control over their own
territory and consequently, confirm the survival of the concept of
116
state sovereignty, reinforcing the core values of the post-
Westphalian system (Kobrin 2001: 200).
The second major characteristic of the nation-state is its population
which is by its definition permanent. Each nation-state constitutes
permanent links to its population through the concept of citizenship
defined in its legal system. Although changes in citizenships are
possible they are executed through very formal legally defined
procedures and in principle, cannot be terminated from the
country’s side (creating people without citizenship). This is the key
difference compared to the MNCs’ temporary linkages to the
population which are based on a legal contract, not an institute,
and as such, can be terminated by both parties. Therefore, there is
no evidence to claim that the nation-state has been deprived of its
population in the permanent sense.
Regarding the government as the final key component of the
nation-state concept, it must be able to define national interests,
short- and long-term goals and come up with effective strategies
how to reach them. The undisputed right to rule, regulate and
govern (internal sovereignty) has been, in principle, detained by the
nation-state and therefore, all domestic as well as international
actors (including MNCs and their affiliates) operating in its territory
have to abide by the national laws. Even though MNCs can choose
some international laws, agreements, treaties, customs or even
arbitrage to provide legal basis for their relations, these possibilities
derive from the will of the nation-state (in case of international
treaties and agreements) or, alternatively, the state authorities are
involved in approval procedures (e.g. in approving foreign arbitrage
results). As mentioned before, the national legislation might be valid
even outside of the state’s territory when dealing with extraterritorial
acts.
117
In addition to that, rules and regulations are used for pursuing and
implementing national policies. Most of the trade, capital, FDI and
antitrust rules do have a direct impact on MNCs and their affiliates
localized in the country and in principle, they cannot be omitted or
circumvented if it is within the corporate strategy to maintain the
operation in the current locations. Governments may protect some
industrial sectors in the name of national interest or in extreme
cases, they may limit the MNC’s ownership rights (intervention). In
order to finance their policies, governments work with state budgets
that ensure the redistribution of resources in the state while the
budget income is generated trough collection of duties and taxes
that all domestic actors (including MNCs) are legally bound to pay.
These arguments drive us towards the conclusion that nation-states
still possess significant means of control over its government,
especially in providing the legal, economic and social framework
through imposing rules and regulations.
To sum up, all the preceding arguments lead us towards the
conclusion that the primary hypothesis of this study has proven to be
incorrect. Although the MNCs have certain way altered the key
characteristics of the nation-states (territory, population,
government) the states have proven to retain some important
permanent institutes that provide the overall political, economical
and social framework for all actors, including the MNCs operating in
their territory.
Further thoughts in this area of study can include the role of unifying
principles in the current and future relationships between nation-
states and MNCs. Some authors128 highlight the importance of
economic liberalization and global capitalism for the establishment
global governance which can be realized through globalization of
the world economy. Nation-states should cooperate on a
128 Such as Andreff (2003), Wolf (2001) or Berger (2001).
118
supranational level and continue in setting international rules in
multiple areas (e.g. global antitrust policies or international
investment rules). Although the concepts of world governance and
“world constitution” might seem too utopian, the doctrines these
suggestions are built upon can be the guiding forces for the future
international cooperation: Principle of subsidiarity, regulation and
consensus.129 This future cooperation among nation-states in the
area of setting international rules and regimes for global economic
entities such as MNCs is left for future researchers to investigate in a
greater detail.
Apart from the primary hypothesis, this study has analyzed the
nature of relationships between the nation-states and MNCs. Are
nation-states and MNCs always in conflict because they pursue
completely different goals? Or do these actors cooperate in some
areas to achieve mutually beneficial goals? Are there any situations
in which they act autonomously on each other? Or can we find
interactions when one of the actors is dependent on the other? The
process of investigating the actors and the way they tend to interact
with each other in a number of various sectors and situations led the
author to an authentic classification of major behaviour patterns.
Nation-states and MNCs have proven (chapter 5.1.) that they pursue
similar or even identical goals in three major areas: economic and
developmental (e.g. positive influence on economy’s growth,
spreading of technology and know-how), social (for example job
creation and CSR) and also political and cultural (organized
interests, lobby or similar attitudes between MNCs and culturally
close countries).
In contrast to that, the thesis has shown (chapter 5.2.) that there are
numerous sectors and situations when MNCs and nation-states are in
129 As Bauchet (2003) suggests.
119
direct or indirect conflict of interests. One of the most obvious
conflicts originates in the different nature of the actors, nation-states
being defined by their territory while MNCs are not limited by
borders in their expansion. Thus, the nation-state loses control over
its territory, its monitoring capacities are seriously restricted because
MNCs tend to internalize most of their activities and transactions.
Second, MNCs regard national markets as an object of competition,
continuously seek to acquire more and more dominant positions,
which, in the end, destabilize the markets of nation-states. Also,
receiving FDI often imply a certain decrease in autonomy of the host
country. Third, the conflict of interests between MNCs and nation-
states can reach certain level when the ownership rights are limited
or directly violated by the host country (intervention). Fourth, the
nation-states sometimes sharpen their attitude towards foreign
corporations through employing nationalistic tendencies into
shaping consumer preferences. Also, numerous conflicts between
the two actors occur in labour and environmental policies.
Apart from these two patterns, the author has found significant
evidence of two other interactions: Firstly, Interdependence of
nation-states and MNCs occurs in tax payments (by MNCs) and their
redistribution (by government), naturally also in bargaining process
as well as in the currently expanding global structures of networks
and alliances. Secondly, evidence has been shown that through
internalization and in monetary issues the two actors tend to position
themselves very independently from each other.
These conclusions from chapter 5 provide substantial evidence to
rebut the secondary hypothesis of this study: Although there are
numerous situations and sectors in which nation-states and MNCs are
in conflict, these cannot be regarded as the only or predominant
model or interaction patterns. The thesis has shown that the two
actors do often join their interests and instruments and start
120
cooperation, or are interdependent in their actions or even act
autonomously on each other.
However, when looking into the future, we might be witnessing major
changes in the interaction patterns between the actors of
international political system. As Schwartz (1999: 141) stresses out
new institutions are emerging, in response the current needs of the
international system, but the shape they will eventually take is still
unclear, as is the extent to which intervention in the affairs of
sovereign states will be tolerated by the international community. As
it was pointed out earlier, the new cooperation should be based on
consensus among all different members of the international system.
Therefore, the most probable emerging global structures will include
both governments and business entities (MNCs) but also other actors
such as NGOs. This developing area full of new choices and
structures is left for future research.
To sum up, this thesis was supposed to clarify what are the current
relationships between nation-states and multinational corporations.
It selected a part of the wide academic and popular debate of the
“decline of nation-state” and the emergence of the world ruled by
multinational corporations. The study has shown what means of
control and instruments these two actors still possess to control or at
least influence the other and also, that the key attributes of the
nation-state have not been fully destroyed by the global activities of
MNCs. Also, the relationships between these two actors are not only
antagonistic as it might seem at the first moment from their mutually
different features, interests and strategies but, apart from the
interdependence and autonomy, a great deal of their relationships
are in a cooperative manner. Not only does this bring hope that the
world of nation-states and global business might survive within one
system but also that through further cooperation, these two actors
121
together with other entities will continue working on a global set of
rules and thus, will improve the quality of the world system itself.
122
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List of Used Abbreviations
CSR Corporate social responsibility
F&A Fusions and acquisitions
FDI Foreign direct investment
GATT General Agreement on Tariffs and Trade
IPE International political economy
JV Joint-venture
MNCs Multinational corporations
NGO Non-governmental organization
OECD Organization of Economic Co-operation and
Development
UNCTAD United Nations Conference on Trade and Development
WHO World Health Organization
WTO World Trade Organization
132
Appendices
Appendix 1: Relations between the parent company and the affiliate
in the international context
Source: Meier and Schier, G. (2001): Enterprises multinationales. Stratégie, restructuration, gouvernance. Paris, Dunod (page 9)
133
Appendix 2:
Selected indicators of FDI and international production, 1982-2006
Source: UNCTAD (2007): World Investment Report 2007. Geneva, United Nations.
134
Appendix 3:
The world’s top 25 non-financial TNCs, ranked by foreign assets, 2005
(Source: UNCTAD (2007): World Investment Report 2007. Geneva, United Nations)
135
Appendix 4:
Prospects for global FDI flows in 2007-2009: UNCTAD survey responses
(Source: UNCTAD (2007): World Investment Report 2007. Geneva, United Nations)