Trans-National Corporations and Their Host Governments - Coursework Example

TRANS-NATIONAL CORPORATIONS AND THEIR HOST GOVERNMENTS Background In the complex arena of international business, transnational corporations or TNCsare the world’s largest economic institutions. Approximately 300 prime TNCs control and maintain at least one-quarter of the whole world’s productive assets, worth about US$5 trillion (The Economist 1993). In addition to size and financial strength, they have progressively become more potent; their significance amplified and they have become influential players in the global showground. With 800,000 affiliates abroad, 60,000 TNCs in the year 2000 had as foreign direct investment (FDI) an overwhelming $1.3 trillion (UNCTAD 2001). Basically, TNCs’ aggregate yearly sales would correspond to or are greater than the annual gross domestic product (GDP) of most countries. A classic example would be Itochu Corporation’s sales which exceed the gross domestic product of Austria, while those of Royal Dutch/Shell run parallel with Iran’s GDP. Together, the sales of Mitsui and General Motors are greater than the GDPs of Denmark, Portugal, and Turkey combined, and US$50 billion more than all the GDPs of the countries in sub-Saharan Africa (UNCTAD 1994). Because of their considerable size, TNCs are likely to control and dictate in industries where output and markets are oligopolistic, or converged in the hands of a comparatively small number of firms. The top five car and truck manufacturers are responsible for nearly 60% of motor vehicles’ global revenues. The five leading oil companies account for over 40% of the industry’s world market share (The Economist 1993). TNCs’ operations cover the whole world; however, they are based for the most part in Western Europe, North America, and Japan. The Swiss electrical engineering giant ABB has facilities in 140 nations, while Royal Dutch/Shell digs up for oil in 50 countries, conducts refining activities in 34 homelands, and markets its products in 100 nation states. Offices of the US food processing firm H.J. Heinz cover six continents and Cargill, the US’s largest grain company operates in 54 countries. Britain’s major chemical firm ICI has manufacturing operations in 40 nations and sales affiliates in 150 countries (Hoover 1993). The term transnational corporation means a “for-profit enterprise” which is explicitly identified by two salient features -- 1) engages in enough business activities -- including sales, distribution, extraction, manufacturing, and research and development -- outside the country of origin so that it is dependent financially on operations in two or more countries; 2) management decisions are made based on regional or global alternatives (Hadari 1973). In essence, transnational corporations are recognised as prime components of capitalism and a most important conduit of globalisation. Globalisation, TNCs and Host Governments In this age of frenetic globalisation, the transnational corporation is indisputably the free markets’ first-class and “untouchable” agent. Economically, these corporate giants dwarf the resources of many developing countries and evidently such status can be attributed to its extraordinary capacity and swift faculty to create wealth. Dubious however, is its reputation as an economic distributor, as a democratic contributor, and as a supporter of human rights in general (Letnes and Westveld 2004). These issues are specifically debatable in developing countries where some view the transnational corporation as a vehicle of development while others see it as nothing but a neo-colonial tool of exploitation. Interaction is Motive-Dependent In the face of contradictory motivations and intentions and the fact that TNCs overshadow many of the smaller economies in bargaining power (Evans 1985, 216-21; Walters and Blake 1992, 124), TNCs engage in positive dialogues with host countries economic and social conditions (especially in the sphere of human rights) -- out of either a genuine sense of social responsibility or out of respect for the market force of the spotlight phenomenon (Ruggie 2003, 110-18; Jenkins 2001, 26-30). However, no business can survive without paying attention to its immediate bottom-line interests. Hence, the intentions of the TNCs – beyond those of profit maximisation per se – are apt to have bigger influence on host country’s conditions than any well-intended policies, whether genuine or imposed. The motives and interests of TNCs will greatly depend and change accordingly to the kind of activity being carried out (Dunning 1993, 63; Spar 1999, 57-67). Those corporations deeply ngaged in primary sector activities will have very different motivations compared to firms engaging in secondary or tertiary sector activity (Spar 1999. Therefore, as the structure of FDI goes through a shift from the primary to secondary or tertiary sectors (Lall 1997, 173-76), such is paralleled by a modification of motives and interests of the TNC. Primary sector determinants, for instance, labour costs and natural resources, are often contended to have negative effects on both individuals and the environment and therefore has bearing on how TNCs deal and interact with their host economies (Cypher and Dietz 1997, 444-45; Madely 1999, 15). For the greater portion of the populace to benefit then, the host government needs to reinvest freshly acquired capital, rather than to fortify and enhance their own position. Unfortunately, this has not been a brilliant scenario (Spar 1999). The higher value-adding TNC activities in the secondary and tertiary sectors, on the other hand, are viewed as a mean for propping up technological upgrading in the host countries (Narula and Dunning 2000, 160-61). As it is, TNCs become less dependent on host government ties when the composition of FDI is located in the secondary and tertiary sectors, as resource sites do not limit them, and have a wider range of possible investment sites from which to choose from. Motivated more by the search for low cost skilled labour and expanded markets, the implication for host countries also change. Now bottom-line interests, not moral obligations, argue for maintaining the health, training and pay of workers in order to increase their productivity and the quality of their output (Spar 1999, 60-67). Interaction vs. TNC Effects Succinctly, there are two ways in which TNCs might affect and deal differing conditions in a host country – through direct and indirect effects. A direct effect is evident, this is where TNCs shape and influence the lives of the host country’s population in an explicit manner, whether physically, economically or otherwise. In contrast, indirect effects are not that clear-cut. In this scenario, they are understood to mean where TNCs contribute to the development of the country – whether for good or bad. A classical example is where FDI contributes to economic development, which again contributes to the development of democracy (UNCTAD 1999; Poe and Tate 1994; Donnely 1998). Most researchers’ contention is that TNCs in general have a positive impact on host countries’ economic development (Balasubramanyam et al. 1999, 28-37; Bardesi et al. 1997, 105-06). This positive effect and consequently the way on how TNCs deal and interact with their host governments, are, however, conditional depending on the TNC-host country’s balance of bargaining power (Evans 1998, 220; Panic 1998, 273), the composition of FDI (Dunning 1993, 63; Spar 1999, 57-67), and on the host countries’ level of created assets (Borenzstein et al. 1998, 133-34; Letnes 2002, 52-54; Xu 2000, 491). Likewise, the host countries’ level of natural and created assets are not to be viewed as self-regulating since resource abundance has been seen as a blight to institutional development and the general development of human capital (Isham 2003, 6-11; Ross 2001, 256-357). Thus, it can be said that host country characteristics accentuate the significance of host countries’ stage of development (Dunning 1993, 272-76). That is, the more economically developed a host country is, and the more created assets (e.g., human capital, high quality institutions) it possesses, the more it is expected to benefit from the presence of transnational corporations and the more that it is to build up and carry on democratic values. The fact that the effects of TNCs on host countries’ prevailing conditions also appear to depend conditionally on both the composition of FDI together with the bargaining power of the host countries. We might even speak of a virtuous cycle as far as investments in the secondary and tertiary sector concerns, as corporate investments, human capital, economic development and democratic values seem to mutually reinforce each other. However, corporate investment is not the likely trigger here as TNCs are more likely to invest in host countries where the other variables already are well developed (Narula and Dunning 274-79). Host countries, therefore seem to face a two-edged dilemma -- on the one hand, TNCs can provide assets like human capital and technology; on the other hand, TNCs are more likely to invest in host countries where these assets already exist. Narula and Dunning refer to this phenomenon as “the danger of falling behind,” and some areas are falling farther behind than others, especially sub-Saharan Africa (Lall 1997, 189). Global Economic Streamlining and its Impact The preceding years brought about reinforced and fortified processes of globalisation under neo-liberal strategies stressing market-oriented approaches to economic development (Brecher et. al. 2002; Strange 2000; Mann 2000; Dicken 1998). An upshot of global economic restructuring is that host governments are robustly dissuaded from trying to regulate and control trade and foreign investment. Some see contemporary patterns of economic globalisation and the mobility of capital as shifting power away from governments to pursue progressive economic policies or redistributive social policies, and usurping powers that rightfully belong to people and to their representatives in government. Articulated briefly by the ILO Director General, “… globalisation is eroding government policy instruments which have such a decisive impact on the level and quality of employment and on domestic policies for social progress” (ILO 1994, 90-94). Governments are barred from favouring their own citizens legally in some ways, and fearful in other ways due to their dependence on foreign investment (Faux, 2002). The position of the state has been weakened further by structural adjustment measures implemented by the International Monetary Fund (IMF) and the World Bank (WB) (Brecher et. al. 2002; Dicken 1998). For several nations, these institutions now determine the terms of trade, wages, currency exchanges, and state development policy (Safa, 1995). Other global institutions such as the World Trade Organization (WTO) have obtained a lot of power once reserved for national governments. Trade agreements such as the North American Free Trade Agreement (NAFTA) and the WTO tend to be controlled by the wealthy, industrialised countries that set the agenda to protect the interests of foreign investors and the mobility of capital in supply chains, but do little to protect the interests of labor (Basu 2001; Connell 2001). Another key outcome of global economic restructuring, which began as early as the 1970s, is that TNCs have come to play a dominant role in the new economic order (Brecher et. al. 2002; Sklair 1998/1995). As the power of TNCs steadily mounted, the ability of the state in lesser developed countries to pursue national goals such as local economic and human development are constrained by enadequate leverage over global corporate actors (Dicken 1998). A lot of TNCs heavily depend on international subcontracting arrangements in developing countries. Because they tend to relocate where labor costs are lowest, low-income countries must compete with one another to attract foreign investment and to attain employment opportunities (Boswell and Chase-Dunn 2000; Dicken 1998). One way that countries attempt to undercut their competitors is to create EPZs. An EPZ is a “relatively small, geographically separated area within a country, the purpose of which is to attract export-oriented industries, by offering them especially favorable investment and trade conditions as compared with the remainder of the host country” (UNIDO 1980, 6). Foreign investors are attracted to the zones for tax incentives, lax environmental standards, and a guaranteed cheap and compliant workforce (Korten 2001; Rodrick 2000). In some EPZs minimum wages are suspended, unions are forbidden, and benefits, job security and working conditions are very poor (Sklair 1995; Bailey et. al. 1993). This has been referred to by many critics as the “race to the bottom.” However, the race to the bottom phenomenon is highly contested among social scientists. Many see globalisation as providing states with a potential strategic coordinating role, underscroing the constraints as well as the creation of new demands that can push the reform of the welfare state and the renewal of social democracy (Greider 1998). Dicken (1998) and Sklair (1995) contend that the relationship between TNCs and governments can be both cooperative and conflicting in that it is dialectical and changing over time. The ability of TNCs to play countries’ bids for investment against one another depends upon the specific relative bargaining power of TNCs and states. Though there is no consensus as to what extent states or global markets are in control of socio-economic life, there is a general agreement that globalisation provides great opportunities for human advance, but only with strong governance. In EPZs, however, TNCs enjoy an advantage in the balance of power due to particular arrangements under which the interests of workers and governments are compromised in comparison to other sectors of the economy. Countries’ and their Differing Experiences (US – Japanese) That Japanese corporations display characteristics in their domestic operations that are regarded as unique (Womack, Jones and Roos 1991) and which, if they are changing at all, are doing so only slowly (Yamamura 1994), however, suggests that it is likely that the operations of Japanese companies will continue to differ from those of other TNC subsidiaries. Some of these unique dimensions of Japanese corporations, inter-corporate relations, and the relations between corporations and the home government, such as aspects of the famed “lean” production techniques--just-in-time sourcing, etc.--may, if replicated in overseas affiliates, work to the benefit of the host economy. Others, such as the keiretsu relations that link assemblers and suppliers, may not (if they exclude locally-owned companies from production networks). Management Localisation and Autonomy Japanese subsidiaries are far less likely than their US counterparts to employ local managers, to employ local personnel in senior technical roles, or to have nationals of the host country on their boards. Even where local managers are employed, they are often “shadowed” by Japanese personnel and are relegated primarily to the performance of public relations roles for the company. In their study of Japanese subsidiaries in Australia, Nicholas et al. (1995, 22-3) concluded that Japanese nationals dominated the upper echelons of management, and that “there was a systematic bias in favour of Japanese managers holding key management positions, especially those involving the implementation of the technology or human capital critical to the competitive advantage of the firm.” The relatively low levels of employment of locals in key management and technical positions reduce the prospects for the transfer of tacit technical knowledge to the host economy through personnel who gained experience in Japanese subsidiaries and then capitalise on those knowledge by breaking away to establish their own companies. Moreover, because Japanese managers are less likely to speak local languages and to maintain social networks that include personnel from domestically-owned companies, management in Japanese subsidiaries is likely to be less well-informed than other TNC subsidiaries about the production and technical capabilities of locally-owned firms. Not only is management in Japanese subsidiaries generally less localised than that of other TNC subsidiaries but management enjoys far less autonomy in key areas of decision-making. Several studies have found that decision-making within Japanese TNCs are apt to be hierarchical and centralised in the hands of those occupying headquarters. Managers of subsidiaries enjoy little freedom of action on issues such as the sourcing of capital goods and components (Kreinin 1988). No evidence exists that the vintage of the investment has any significant effect on localisation of decision-making. Replication of Production Networks Japanese companies have a greater propensity than their American counterparts to internalise their ownership-specific advantages through the replication of their production networks when investing overseas. A study by JETRO in 1994 found, for instance, that nearly a quarter of the 62 Japanese affiliates in Malaysia interviewed had invested locally in response to a request of a Japanese assembler (Japan External Trade Organization, 1995a). The vintage effect here may cause a greater divergence rather than a convergence in the behaviour of Japanese and US subsidiaries as, over time, Japanese companies build a more complete local replication of their domestic supply networks. In turn, the replication of supply networks produces another inter-country difference in FDI -- small and medium-sized enterprises (SMEs) have a greater share in Japanese FDI than in that of US companies. In general, the foreign investments by these smaller companies are less likely to be driven by the desire to exploit such ownership-specific advantages as proprietary technology than by the advantages that they enjoy by virtue of the nationality of their management and their established trading links with the large assembly companies. And their investment is more likely to be driven by location-specific advantages such as low labor costs. By 1993, Asia accounted for more than 90% of the worldwide investments by Japanese SMEs. This concentration has been attributed by JETRO (1995b, 20) to their search for inexpensive labor. For the host economy, investment by these SMEs has a greater potential to have a crowding-out effect on local entrepreneurs since these companies occupy relatively low-technology niches that startup local enterprises might reasonably aspire to fill. Some evidence, mainly anecdotal, exists that just such a crowding-out effect on local firms has occurred in Malaysia (Ali 1994; Rasiah 1995). In addition, SMEs are more likely to maintain management and key technical positions in the hands of home country nationals than their larger counterparts (Chi Schive 1990). Centralisation of Research and Development Locally-owned firms, or more accurately, companies that have their home base in a particular territory, (Porter 1990, 19) are more likely to carry out a greater range of activities, especially high value-added activities, in the national territory than are subsidiaries of TNCs. In Porters words, “The home base will be the location of many of the most productive jobs, the core technologies, and the most advanced skills.” The concentration of higher value added activities in the home base results not only from the historical development of the companys activities and the local linkages built up over the years, but also, amongst other factors, from the availability of skilled personnel, from pressures from home country governments, shareholders, and workers, from the capacity for realising lower transaction costs, and from concerns over the protection of proprietary knowledge. In particular, research and development activities tend to be concentrated in home countries. Dunning (1993, p. 303) reports that only 9% of all research and development activities undertaken in 1989 by US TNCs was conducted by their foreign subsidiaries (only a modest increase over the 1966 share of 6%); for Japanese companies in 1989 the ratio of foreign to home country expenditure was even lower -- only 5% (Dunning 1993, 303). This general reluctance of Japanese companies to transfer research and development activities to overseas subsidiaries is reflected in their operations in East Asia. Various surveys have shown that Japanese subsidiaries in Southeast Asia are seldom given responsibility for more than incremental process improvements, as it is, product research and development are rare. Itoh and Shibata (1995, 196) reported that only two research and development facilities had been established by Japanese firms in Asia, both of which were in Malaysia: a joint venture between Sanyo, Mazda and Ford for car stereo equipment (a venture that subsequently was reported to have foundered) and Matsushita’s R&D facility for air conditioning equipment (this estimate may be a modest understatement of the number of Japanese subsidiaries in the region that undertake some research and development activities). Ernst (1994b, 21) reports eleven instances of subsidiaries engaged in product development but cautions that it is unclear whether such development amounts to anything more than simple product adaptation for the local market. The general conclusion that Japanese corporations currently undertake little R&D in their Asian subsidiaries stands. The significant contrast with US subsidiaries that increasingly have been given responsibility for product design and development, in some instances not just for local but global markets (Borrus 1995). Japanese and U.S. subsidiaries in East Asia have differed significantly in their technology transfer to host economies and especially in their linkages with locally-owned companies. This conclusion follows from several of the points that have been made -- the dominance of Japanese nationals in key management and technical positions, the lack of autonomy the affiliates enjoy in sourcing, and the development of supplier networks involving local investment by Japanese SMEs. 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