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The Politics of Multinational Corporations

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Sujin Hong

on 26 May 2014

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Transcript of The Politics of Multinational Corporations

The Politics of

What is a Multinational Corporation?
Bargaining Power
oriented toward reaching agreement on
how the income
generated by an investment will
be distributed
between the MNC parent and the host country.
Most governments have excluded foreign firms from owning industries considered "critical" but they have not drawn the lists of sectors from which foreign firms are excluded so broadly as to discourage MNC investment

A corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries.
In conclusion, the politics of MNCs emerge when distinctive interests of host countries, home countries of the MNCs, and the MNCs themselves conflict. And in the international arena, these conflicts between them have prevented the creation of comprehensive rules to regulate international investment.
5 Miller, Herman. "Companies Going Global." Prestige Business Interiors. http://www.prestigebusinessinteriors.com/assets/Uploads/wpCompaniesGlobal.pdf (accessed January 18, 2014).
""Include Raw Food"." Include Raw Food. http://www.rawfoodvancouver.com/the-coca-cola-conspiracy/ (accessed January 21, 2014).
Hong Su Jin

the regime of nation states
is built on the principle that the people in any national jurisdiction have a right to try to maximize their well-being, as they define it,
within that jurisdiction
, on the other hand, is bent on maximizing the
well-being of its stakeholders
from global operations, without accepting any responsibility for the consequences of its actions in individual national jurisdictions". (vernon 1998,28)

All politics is local

But, MNCs do alter
the nature of economic decision making
Historically - decisions are made by
local business owners
with reference to
local conditions
MNCs -
foreign managers
with reference to
global conditions.
In domestic arena
most governments have used national regulations and restriction to regulate MNC activities and have bargained with them to ensure that the operations of foreign firms are consistent with national objectives.
Host countries
(especially developing world) : want international rules that codify their right to control the MNCs
Home bases for MNCs
(advanced industrialized countries) : want international rules that protect their overseas investments by limiting the ability of host countries to regulate the activity by MNCs.
From now,

1. Regulating MNCs in Developing World
2. Regulating MNCs in the Advanced
Industrialized Countries
3. Bargaining with MNCs
4. The international regulation of MNCs

Regulating MNCs in the
Developing World
Host Country
Home country
Goal of regulations by host governments :

extracting as many of the benefits from FDI as possible, while minimizing the cost of ceding decision-making authority to foreign firms.
Why the developing countries and the advanced industrialized counties adopted such different approaches toward MNCs?
Regulating Multinational Corporations in the Developing World
Governments in newly independent developing countries wanted to establish their political and economic autonomy from colonial power

often this entailed taking control of existing foreign investments and managing the terms under which new investments were made.
: as primary commodity producers and exporters after postwar period
The central political and economic concern
political concern
- foreign ownership of critical natural-resource industries compromised the hard-won
national autonomy

economic concern
(Import substitution industrialization) strategies.
An economic theory employed by developing or emerging market nations that wish to
increase their self-sufficiency
decrease their dependency
on developed countries. Implementation of the theory focuses on
protection and incubation of domestic infant industries
so they may emerge to compete with imported goods and make the local economy more self-sufficient.
responded to these concerns by

in some sectors MNC ownership of the economy (public utilities, iron and steel, retailing, insurance and banking, and extractive industries) rather than prohibiting FDI
in the extractive industries and in public utilities such as power generation and telecommunications :

Political objectives
- to rally domestic support and to silence domestic critics by taking over the symbols of "foreign exploitation".

Economic objectives
- And it made "rational economic planning possible for the economy as a whole and enhance the government's financial position sufficiently to make economic diversification and balanced economic growth attainable" (Shafer 1983, 93-94)

1. Nationalization
Governments created

required local affiliates to be majority owned by local shareholders
limited the amount of profits that MNC affiliates could repatriate as well as how much affiliates were allowed to pay parent firms for technology transfer.
imposed performance requirements on local affiliates to promote a specific economic objective
required MNCs to conduct research and development inside the host country
limited the access of MNCs to the local capital market.

2. regulatory regimes
Other developing countries
- most restrictive with ISI strategies
- actively sought FDI regulating the sectors which MNCs could invest
East Asia
- pursuing export-oriented development strategies
Creating EPZs(export-processing zones)
: Taiwan and South Korea
Factors :
1. restrictive regimes yielded disappointing results

2. to broader shift in development strategies
on FDI in most developing countries (since 1980s)
more open to FDI but, not enough to make comprehensive international rules to regulate international investment
Almost none
Regulating MNCs in the
Advanced Industrialized Countries
: More open to FDI
Less regulate MNCs' activities
- prohibited foreign ownership in radio and television broadcasting stations, domestic airline, defense-related industries
Japan -
tightly regulated inward FDI until 1970 to encourage
technology transfers
(ex. IBM) after 1970 they opened the number of industries to foreign investment
In summary,
Even though the advanced industrialized countries have been
more open to FDI
then developing countries, they have attempted to manage the terms under which MNCs invest in their countries
them from the forefront of
and the sectors that connected closely to
national security
Bargaining with Multinational Corporations
The more the host country has exclusive control over things of value to the MNC, the more bargaining power it has, vice versa.
Function of Monopolistic control
Host countries
with monopoly have
bargaining power +
most of
the gains
from investment

MNC X does not
with monopoly have
bargaining power +
largest share of
the gains
from investment

Host countries X
In natural-resource investment
MNCs can choose where to invest
and they have monopoly over the capital, the techniques, and the technology required to extract and refine the natural resources and the return on the investment is uncertain
!Obsolescing bargain!
(1960~1970s Nationalizations)
Host countries's monopoly = MNC
Host countries with X monopoly MNC X
In labor-intensive manufacturing investments
MNCs can choose between many potential host countries, small amount of fixed capital, technology changes rapidly, manufacturing investments do not become hostages as natural-resource investment
!Locational incentives!(tax,direct financial incentives, grant, subsidized loan)
3 factors
that the typical advanced industrialized country has been
less inclined to try to restrict
the activities of MNCs :
developing countries have been more vulnerable to foreign domination and the lack of diversification in developing countries
advanced industrialized countries often both host foreign firms and are home base to MNC parents
differences in how government approach state intervention in the national economy
The international Regulation of Multinational corporations

There are no comprehensive international rules governing the activities of MNCs.
because of the conflict between the capital-exporting advanced industrialized countries and the capital-importing developing countries
4 Legal principles of international rules governing FDI
1. Foreign investments are private property to be treated
at least
as favorably as domestic
2. Governments have
a right to expropriate
investments, only for public purpose.
3. In case of expropriating a foreign investment,
must compensate
the owner for the full
value of the expropriated property or must be
"adequate, effective, and prompt"
4. Foreign investors have
the right to appeal
to their home
One exception
Latin America
Calvo doctrine
: no government has the right to intervene in another country to enforce its citizens' private claims
Fist challenge
to these legal principles by
Soviet Union
Latin American countries

with the notion of "public purpose" posed a challenge to the principle of compensation
Only the
as a capital-exporting country had a clear interest in establishing multilateral rules that secured their overseas investments in postwar period
ITO(International Trade Organization)

Why ITO experience is important?
1. the failure of the ITO meant
that there would be no
international rules governing
FDI but GATT became the
center of the trade system

2. the failure of the ITO reflected
a basic conflict that has
dominated international
discussions about rules
regulating FDI to this day

Developing countries
objectives working through UN (central element of the
New International Economic Order
) :
"maximize the contributions of MNCs to the economic and social development of the countries in which they operate"

and they secure the passage of the
United Nations Resolution on Permanent Sovereignty over Natural Resources
in 1962 which recognized the right of host countries to exercise full control over their natural resources and over the foreign firms
The New International Economic Order (NIEO) was a set of proposals put forward during the 1970s by some developing countries through the United Nations Conference on Trade and Development to promote their interests by improving their terms of trade, increasing development assistance, developed-country tariff reductions, and other means. It was meant to be a revision of the international economic system in favour of Third World countries, replacing the Bretton Woods system, which had benefited the leading states that had created it–especially the United States.
opposition by advanced industrialized countries
: the codes remained in limbo until 1992
Uruguay Round
Under pressure from the US, TRIMs(trade-related investment measures) which favored the capital-exporting countries' interest were placed on the agenda
Opposition by developing world
: a limited agreement as a result of two changes that affected negotiations
1. The advanced industrialized countries scaled back their
demands, agreeing to focus on 4 investment
measures -
domestic-content rules
restrictive foreign exchange practices
constraints on the ability to link investment incentives
to export-performance requirements
2. Developing countries' attitudes toward FDI also were
changing (progressive liberalization of FDI in the late 1980)
MAI (Multilateral Agreement on Investment)

in the OECD in May 1995
due to conflict among OECD governments and opposition from coalition of interest groups outside the process
Negotiations ceased in December 1998
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