Transnational corporations

SUM 3000/4000March 7. 2006

Audun Ruud, Centre for Development and the Environment - SUM

University of Oslo

Foreign Direct Investment (FDI):

Financial, physical or human transfers of capital with the purpose to control management and revenues.

A FDI contitutes a TNC

A Transnational corporations (TNC):

is a corporation (firm) with power resources to control value-added activities in two or more countries – even without formal equity control of the commercial activity in question

FDI is normally related to shares of ownership beyond 50% (this is the reporting (tax) requirements in Norway). However, formal control can also be achived with significantly lower equity shares. Influence can even be exercised without any formal ownership of the unit/plant/firm in question

Internationalization (Int.) refers to the extension of economic activities across national borders – for example through trade and investments.

Globalization is qualitatively different as it also involves a functional integration across national borders of economic activities

Internationalization creates a basis for globalization through increasing transnationalization (trans) driven by foreign investments.

Bilateral Regional GlobalInt. Barents Sea Nordic Council

EU WTO

Trans. Raufoss’ supplies SAS Shellto Volvo Eurofighter

There are three basic questions to be raised if we want to study (or discuss) TNCs:

1. Why do TNCs exist?

2. How do they operate?

3. What are the effects of TNC activities?

My own focus is particularly on politics impacts and execution of corporate power:

What kind of power is used and what is the purpose?

The Power relation between a TNC and political authorities (both at home and abroad ) may be a function of:

The relative interest by the authorities The share of control that the TNC concerning the TNC activities X exercises over these activities_________________________________________________________

The relative interest the TNC has The share of control the autho-for what the authorities may offer rities have concerning the TNC

activity in question

However, is it feasible only to study this power relation as simply a function ofInterests and control?

TNC VertslandLimitations Power resources Powerresources Limitations

Degree of Technology Access to Alternativecompetition and and innovation, home market globalconcentration in integrationIndusty Management Control of

natural resources CompetitionFinance between

The corporate Solid infra- host countriesdependency of Distribution structurethe host country Trade balanceas customer or Marketing Political climate and foreign debtdistributor

Employment Incentives Dependence ofFDI

.......Political climate

Advantage TNC Changes in relative bargaining strength Advantage host country

However, structural and idea-based power also influence these dynamics

Different national political-economic systems:ideological capitalistbase: orientation:

a. The market oriented state strong strongb. The regulation oriented state weak pragmatic strongc. The active developmental state weak pragmatic weakerd. The steering oriented state strong weak

What is the actual national politics for sustainable development formulated by:

a. The market oriented state ?

b. The regulation oriented state ?

c. The active developmental state ?

d. The steering oriented state ?

Inter

nation

al poli

tics;

Gover

nmen

t vs.

gove

rnm

ent International econom

ics;

Firm vs. firm

International political economy;Governments) vs. one or several firms

Actual decisions implemented ???

International political economy is more than just states and markets. Firms are increasingly becoming an independent political agent!

The current international political economy creates new dynamics:

(In this context I consciously ignore the civil society as the focus is on TNCs)

AUTHORITIESOn which level, and with what kind of policy tools?

TNCWhere and to what extent

LOCAL INDUSTRYOn what conditions, and

with what kind of knowledge

?

National border

Motivations driving TNCs to see promote FDI:

1. Markets for existing resources – down the value chain2. New - up the value chain (upstream)3. Efficiency gains – oriented toward current activities

Often, all the three drivers influence the firm simultaneously, but often at different locations of the firm (at home (HQ) or abroad (OECD or LDCs) :

A continous consideration of:

International ko-ordination versus national adaptation

High

Low

Low High

Export-basedstrategy

Focus: Control of raw materials

Focus: Control of markets

2. Multinational strategy

3. Complex globalstrategy – (with growing service component

1. Transnational strategy

The evolution of TNCs

Political needs in a host country Economic international requirementsTh

e st

rate

gy a

nd a

ctio

n of

the

TNC

The features of national politics are increasingly influencedby corporate firm-specific strategies:

positive

negative

1. The feature of the transnational organization

Then we need to study:2. Transnational transfersWhat is transferred internally within the firm – including intra-firm trade

Then we need to study3. Transnational local demandTo what degree do the TNC procure goods and services locally?

4. Transnational investmentsWhat is de facto plought into local and the hosting economy/society

These are four necessary, but still insufficient question to answer

Sustainable Development is not created automatically?To a large extent a question of politics

To understand the direct impact of TNCs’ activities on sustainable development, first of all we need to understand:

Cross Border Environment ManagementA Systemic approach :

A vicious or a virtuous circle?a race to the top or to the bottom?

1. environmental policies

2. environmental standards

3. environmental guidelines

4. local procedures

5 environmental auditing

6 Control andcommunication

Factors influencing the environmental practice of TNCs in India:(findings based on fieldworking among 53 TNCs in 1999)

Policy and practices of TNC headquarters: 50 per cent

Regulations 23 per cent

Local Management 13 per cent

NGOs 6 per cent

Consumers 6 per cent

Fear of accidents (only) 2 per cent

Policy implications based on a survey of 53 TNCs:

1. TNCs are not necessarily using India as a dumping ground for obsolete technologies

2. Local networking within the value-chain, however, is limited

3. Path dependency is strong

4. Developmental impacts are limited:

TNCs are creating ”islands of excellence in a sea of dirt”!