Transnational Corporation from Developinh Countries
Basic Requirements for Assignments: All papers submitted must meet the following requirements concerning margins, line spacing, font size, cover page format, and format. Papers written for this course are to follow the standard page format. That is, papers are to have one inch margins on both the left and right sides and the top and bottom of the page. Papers are to be double-spaced. Acceptable font sizes are 10-12 characters per inch Times New Roman. Papers must include a cover page indicating the title of the paper, the name(s) and student number(s) of the author(s), my name (spelled correctly), the course number and the date. Papers should also include a word count on the last page of the written portion of the assignment (i.e. before end notes, if any). Finally, papers are to be in Word or PDF format.
(A) Seminar Papers: The papers should be two-three pages in length (500-750 words).
(i) analysis: In this form of writing, you should analyse an interesting or significant point raised in the reading(s). The purpose of the papers is to analyze the content of the reading, not repeat what the author(s) has written; the papers are analytical in form, not descriptive. The paper should not be a restatement of the reading(s) but rather an analysis of a relevant issue or argument put forward by the author(s). Remember I have read the readings and am familiar with the content. When preparing the seminar papers, you should keep in mind the following questions:
(a) What is the main argument?
(b) What evidence is provided to support the thesis?
(c) Is the evidence provided convincing? Is it connected with the thesis?
(d) What, if any, underlying assumptions guide the analysis?
(e) Does my paper go beyond description or reiteration of the reading?
(f) What is the thesis statement in my seminar paper? Is it clear? Is it supported?
Transnational Corporation from Developing Countries
All companies that import or export are engaging in transansnational economic activities. If they lobby foreign zovemments about trade, they become transnational political actors. However, they are not known as trans- national companies (TNCs) until they have branches or subsidiaries outside their home country. In 2011, among the 100 TNCs with the highest levels of assets outside their home country, sixty-one were from four- een Western European countries, twenty-two.from the USA, four with dual headquarters in Western coun- tries, six from Japan, and one each from Brazil, Canada, China, Israel, Malaya, Mexico, and Hong Kong. Only developed countries, East and South East Asia, a few Latin American countries, a few Middle Eastern oil producers, India, and South Africa host large TNCs. evertheless, there are now transnational companies based in as many as 147UN member countries, includ- ing ninety-four developing countries hosting the head- quarters for at least one TNC, and fifty-three hosting ten or more TNCs (see Box 21.1). Increasingly, transnation- als are not clearly based in a single country. For example, the world’s biggest steel company, Arcelor-Mittal, has its legal headquarters in Luxembourg, is run from London, and was created by an Indian takeover of Spanish and French steel producers (source: UNCTAD 2012).
Financial flows and lossof sovereignty
The consequences of the extensive transnationaliza- tion of major companies are profound. It is no longer possible to regard each country as having its own sepa- rate economy. Two of the most fundamental attributes of sovereignty, control over the currency and control over foreign trade, have been diminished substantially. These two factors mean that governments have lost control of financial flows. Successive financial crises in the 1980s and 1990s established that governments are helpless against banks and speculators. From 2007 onwards, during the global credit crunch, the com- bined might of the G20 was unable to control the global financial system and the continued existence of the Euro has been threatened. The effects of trade on finance are less obvious. When goods move across frontiers, it is trade between countries, but it may also be intra-firm trade. In this situation, governments cannot have clear expectations of the effects of their financial and fiscal policies on TNCs. A company using primary commodities, such as Starbucks processing coffee, may respond to higher tax rates by changing its transfer prices to reduce its tax bill. Internet-based companies, such as Google
• PETER WILLETTS
Box 21.1 Transnational corporations from developing countries
The classical image of a TNC is a large company from the USA that has expanded production and sales overseas, dominating a global market and exploiting cheap labour in developing coun- tries. In contrast to this, in the twenty-first century, TNCs from developing countries have become increasingly important.
• More than one-quarter of all non-financial TNCs now have their headquarters in developing countries.
.• The top 100 developing country non-financial TNCs in 2011 were from seventeen countries: China, Hong Kong, Taiwan, India, Malaysia, Singapore, Korea, Argentina, Brazil, Mexico, Venezuela, Egypt, South Africa, Kuwait, Qatar, United Arab Emirates, and Turkey.These TNCs are expanding faster, both in their home country and in other countries, than the major developed country TNCs. However, the world’s four biggest TNCs together had more foreign assetsthan all of these 100 companies.
• Most developing country TNCs are small, but some are becoming major players in particular industries, such ascars, electronics, steel, and container shipping. The Chinese TNC,
and Amazon, attribute their operations to offices in countries with low corporate tax rates. Several other motives might induce a company to distort transfer prices, including to avoid controls on the cross-border movements of profits or capital. When this problem only affected developing countries, they could do little to assert their tax sovereignty over TNCs. Now that governments of developed countries are losing substantial tax income, the matter is being taken up by the Organisation for Economic Co-operation and Development (OECD), the G8 and the G20.
Triangulation of trade and lossof sovereignty
Governments have great difficulty regulating interna- tional transactions. Even the US administration was unable to prevent its citizens visiting communist Cuba during the cold war. It may be possible to prevent the direct import or export of goods. However, there is no guaranteed method of preventing indirect trade from one country to another. This is known as triangulation. Only if a UN Security Council resolution obliges all the countries of the world to impose sanctions is there a reasonable prospect of a determined government pre- venting TNCs from evading sanctions. However, in such a situation sovereignty over the relevant trade then
Lenovo, now owns the IBM PCbrand, while two Indian TNCs, Tata and Mittal, have taken over the major European steel manufactu rers.
• Developing country TNCs are more likely to invest in neighbouring countries, but they are increasingly investing in the developed world aswell. They own more than 500 affiliates in the USAand a similar number in Britain.
• In the USA,opposition in Congress to developing country TNCs has been strong enough to block a Chinese takeover of the USoil company, UNOCAL, and to force Dubai Ports World to divest itself of six USports.
Two examples.illustrate this new world of successful developing country TNCs: Marcopolo, a Brazilian company, manufactures busesin several South American countries and sellsthem in more than eighty countries; and Hikma Pharmaceuticals, a Jordanian company, manufactures in two other Arab countries and in Portugal, having strong salesin West Asia and North Africa, along with expansion in Europe and the USA. (UNCTAD, World Investment Report 2012)
lies with the Security Council and not with the indi- vidual governments.
Regulatory arbitrage and lossof sovereignty
It is difficult for governments to regulate the com- mercial activities of companies within their countr+ because companies may choose to engage in regulat arbitrage. If a company objects to one governme policy, it may threaten to limit or close down its I production and increase production in another co try. The government that imposes the least deman health, safety, welfare, or environmental standards offer competitive advantages to less socially respo companies. There is also a strong global trend towar the reduction of corporation taxes. It thus beco difficult for any government to set high stan and maintain taxes. In the case of banking, the cal dangers inherent in the risks of a bank coIl through imprudent or criminal behaviour are so that the major governments first set common standards in 1988, under the Basle Committee These rules were extended, as ‘Basle II’, from cox banking risk to trading risks in 2006. In response global credit crisis of 2007-8, ‘Basle III’ was agreec. 2009-10 to strenzthen the capital rules conside
Chapter 21 Transnational actors and international organizations in global politics •
,;. ion, the application of new rules on liquidity cov- e will start in 2015, to ensure banks have enough cash. Whatever control is achieved does not rep- nt the successful exercise of sovereignty over com- ies: it is the partial surrender of sovereignty to an ‘-’ ergovernmental body.
Extraterritoriality and sovereignty
Transnational companies generate clashes of sover- eignty between different governments. Figure 21.1 :.emonstrates that, when a company has its headquar- zers in the USA and a subsidiary company in the UK, zhree lines of authority exist. The US government can control the main company and the UK government am control the subsidiary. Each process would be the standard exercise of a government’s sovereignty over its internal affairs. In addition, both governments accept that TNCs have their own policies on purchasing, pro- duction, and sales. Usually these three lines of author- ity can be exercised simultaneously and in harmony. However, ~hen the US government’s decisions cover the global operations of the TNC, there is a clash of sov- ereignty. Does the subsidiary obey the UK government or the orders of the US government issued via its head- quarters? This problem of extraterritoriality is inherent in the structure of all TNCs. As a matter of routine policy implementation, clashes now have to be resolved between different deci- sions in different jurisdictions on competition policy, mergers and acquisitions, accounting procedures, and anti-corruption measures. Will US accounting stan- dards apply to European companies because some of their operations are in the USA? Can the.directors of
Government of United States
parent TNCs be prosecuted for the payment of bribes by their overseas branches? The long-term trend is for such questions to be resolved by global standard- ization of domestic policy. For example, the OECD has developed a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
From domestic deregulation to global re-regulation
For most companies, most of the time, their inter- ests will be in accord with the government’s policy of increasing employment and promoting economic growth. Conflicts will arise over the regulation of markets to avoid the risks of market failures or exter- nalization of social and environmental costs of pro- duction. Domestic deregulation and globalization of economic activity mean that regulation is now occur- ring at the global level rather than within individual countries. Three factors involving TNCs push towards the globalization of politics. First, governments can reassert control only by acting collectively. Second, consumer pressures are leading to global codes of conduct being accepted by companies and imple- mented in collaboration with NGOs. A third push is for global companies to submit to social and environ- mental auditing. These factors are coming together in the collaboration between governments, NGOs, and the UN Secretariat to recruit the major TNCs as vol- untary partners in a Global Compact, to implement ten principles of corporate social responsibility on human rights, labour standards, the environment, and anti-corruption.
Government of United Kingdom
—-~–~~–~. TNC subsidiary
Figure21.1 Who controls the UKsubsidiary ofa USTNC?
•• PETER WILLETTS KeyPoints « B • The ability ofTNCs to change transfer prices means that they can evade taxation or government controls on their international financial transactions.
• The ability ofTNCs to usetriangulation means that individual governments cannot control their country’s international trade.
• The ability ofTNCs to move production from one country to another means that individual governments are constrained in regulating and taxing companies.
• The structure of authority over TNCs generates the potential for intense conflict between governments, when the legal authority of one government has extraterritorial impact on the sovereignty of another government.
• In some areas of economic policy governments have lost sovereignty, and regulation now hasto be exercised at the global level rather than by governments acting independently.