Dr Phil Tomlinson

University of Bath

Email: mnsprt@management.bath.ac.uk

January/February 2006

Recap:

Highly Concentrated economies: Rivalry & Collusion co-exist

Essence of the modern corporation: - ‘centres of strategic decision-making’

Need to Consider:

● Internationalisation/Transnationalism

● Relationships with Governments & Labour

● Impact of Transnationals in the Global Economy

‘A Transnational Corporation (TNC) is a firm which has the power to co-ordinate and control operations in more than one country, even if it does not own them’. (Peter Dicken, 2003 p.198).

Transnationality

(Note similarity to Cowling & Sugden’s definition)

Transnational Corporations (TNC’s) are the ‘central actors’ in the world economy (United Nations, 1993)

TNC’s account for 2/3 of world exports

‘production under the governance of TNC’s is now growing faster than other economic aggregates’ (United Nations, 2000).

Foreign Direct Investment (FDI) is direct investment which occurs across national boundaries, that is, when a firm from one country buys a controlling interest in a firm in another country or where a firm sets up a branch/subsidiary operation in another country (Peter Dicken, 2003, p.51). (n.b. this is very different from ‘portfolio’ investment)

Q. What is FDI?

Greenfield FDI FDI via Mergers and Acquisitions

Globally FDI has risen dramatically over the last 20 years

Global FDI Flows (Inward) Global FDI Stock (Inward)

1980 $57 bill $692 bill

2003 $1271bill $8245 bill

Why does Internationalisation occur (Macro-explanation)?

Domestic Demand Deficiency hypothesis (Pitelis, 1996, 2000)

Rising Domestic Industrial Concentration, HH↑

→ P > MC

→ ↓C (since labour’s share of income falls)

→ Foreign Markets become attractive (Exports then Transnational Option)

Other (micro) related reasons:

Dunning (1988) - Firms engage in international production for the following reasons:

● Market Seeking – new market opportunities

● Asset Seeking motives – buying up foreign assets, M&A’s

● Efficiency Seeking – lower cost options (labour costs)

● Resource Seeking – to secure control of a strategic resource/input.

Hymer (1976 (really 1960!))

• International oligopoly - firms are ‘active agents’ & will look to sustain rivalry and collusion on an international stage

2 related characteristics of TNC:

• Firms possess a ‘specific advantage’ over indigenous rivals

- maybe technological/organisational

- overcome disadvantage of operating overseas

This is a necessary but NOT sufficient condition to become a TNC!

Theory of the Transnational Corporation

• Being a TNC must ensure a ‘Removal of Conflict’ i). FDI enables firms to maintain close control over global operations (problems with other means of serving a foreign market via exports/licensing/subcontracting)

ii). mutual interdependence/international collusion (Agreements/Joint Ventures?) e.g. see Knickerbocker (1973) – US TNCs, industry study

US firms imitated behaviour of their domestic rivals internationally

overseas investments are ‘bunched’, ‘herding behaviour’,‘following the leader’, ‘tit for tat’ investments

- cycles of aggressive/defensive (international) investments

Dunning (1994) – similar story with Japanese TNCs in EuropeTomlinson (2005) – Japanese Auto-Firms around the globe

iii) Reduce labour militancy (via divide and rule – see later)

Hymer’s emphasis is upon the oligopolistic nature of the TNC and their desire to retain control over operations.

He saw them as dominant players in the global economy, which would have wider implications for democracy and development

Hymer argues:

‘The TNC tends to create a world in its own image by creating adivision of labour between countries that corresponds to the division of labour between various levels of the corporate hierarchy. It will tend to centralize high-level decisions in a few key cities in the advanced countries…and confine the rest of the world to…the status of provincial capitals, towns, and villages in a New Imperial System’ (Stephen Hymer, 1970 (AER), p.466).

This heightens the risk of ‘Strategic Failure’:

a situation that occurs when strategic decisions – on the key economic variables – are taken by corporate elites, whose interests conflict with the wider public interest.

(Cowling & Sugden, 1999)

Corporate Relations with Government

• ‘Divide and Rule’ of governments (who compete for Investment) e.g. with (host) governments e.g. late 1990s Toyota and French/UK govts..

• ‘Incentive competition’ between countries : taxes, subsidies, labour legislation

• Transfer pricing: minimise global tax liabilities. Evidence: Dicken (2003) for US and UK

• Trilateral Commission: 1990s Multilateral Agreement on Investment – would have allowed TNCs to successfully challenge the laws of nation states

Corporate Relations with Labour

• Divide and Rule of labour

Splitting production can enhance a firm’s bargaining power vis-à-vis labour: generates intra-firm competition.

Multi-site production provide an hedge/ ‘inside option’:

It can occur in multi-plant firms or extended use of the sub-contracting sector

Evidence:

Scherer (1975) - ‘firms with one plant were penalised by lessened bargaining power in dealing with unions’.

Peoples & Sugden (2001) – case evidence on divide & rule from UK, USA & Canada

Addison et.al (2003) – UK in multi-plant firms, plants more likely to close where strong union presence. Not the case in single plant firms

Coffey & Tomlinson (2003) – Japanese auto-sector; domestic & global subcontracting to control workers

Consequences:

Places downward pressure on real wages (leading to under-consumptionist tendencies):

Over last 20 years

US real wages have been stationary

UK: lowest paid workers hardly benefited at all from any real wage growth in the economy: ‘shift of income from wages to capital income (profit and interest)

Growing inequality within and across countries: Various IFS studies, Dicken (2003)

Case Study: Japan

Japanese Industrial Policy (post-1945)

Johnson (1982) – ‘developmental state’

• Role of MITI

Promoting ‘strategic industries’

1950s & 1960s – iron & steel

1970s & 1980s – consumer durables (automobiles & semi conductors)

- Discriminatory tariffs, import restrictions, tax & subsidies

- Restrictions on FDI & control over imported technology

• Institutional arrangements:

- Banking keiretsu – collective borrowing arrangements facilitating low cost finance arrangements

- ‘Dual structure’ – small firm networks (keiretsu), close co-operation between firms supplying goods to larger firms (vertical chain)

• MITI’s industrial strategy favoured corporate Japan with keiretsu being subservient to giant corporations (Piore & Sabel, 1984)

- Approved Cartelisation programme

- Successful Business lobbying (Johnson, 1982)

(lifting of FDI restrictions 1971)

- Policy of promoting ‘national champions’

Corporate Japan’s global expansion

• Since early 1970s, extraordinary growth in overseas Japanese FDI.

Between 1981-1995, FDI amounted to $470 billion. Highest growth rate (average 22%) of any G8 country.

• Corporate Japan’s % share of global FDI stock

1980 – 3% (marginal player)1997 – 12% (2nd only to US)

Many reasons: Development of transnational production networks, divide and rule, lower labour costs, avoid trade barriers, role of strategic contingency (Knickerbocker effect),

‘Hollowing out’ of Japanese manufacturing

• Diversion of Investment

Japanese firms rely upon net earnings as main source of investment (Corbett & Jenkinson, 1996)

They will distribute these amongst competing (international) locations

- Labour Cost considerations will be a key determinant (MITI, 1996)

- Low cost East Asian transplants

-China (wage rates 1/30th of those in Japan).

Overseas investment ratio (overseas/total investment (home & abroad by Japanese firms))

1992: 8.8%2001: 20%

Discrepancy in Japanese outward/inward stock of FDI of 12:1

Domestic capital stock is not being replenished

Tomlinson (2002): focus on Japan’s machinery sectorEstimates series of investment (and employment) equations:

Finds that Japanese investment (and employment) is highly sensitive to changes in international wages

Reflects increasing vulnerability of Japan to TNC activity

• Isolation of Japan’s small firm sector

‘weaker bargaining position’

‘declining order books’

‘Lower profit margins’ and ‘record bankruptcies’.

Regional Decline: industrial belts of Kanagawa, Tokyo, Osaka & Saitama in particular.

Higher levels of unemployment

• Macro Economic Stagnation

1990s: Real Japanese output fell by 10%

Number of business establishments fell by 15%

Employment fell by 15%

Negative effects on the trade balance – (after accounting for the export induction effect, export substitution effects, re-importation effects)

Declining Productivity

Attempts to revive economy repeated failed

Fiscal crisis (1997), Various Monetary policy failures

Policy Options:

recognise that Japan’s problems are one of ‘strategic failure’

• Regional Policies and Small Firms

Note: Technopolis project (1980s) & PTR centres (although aimed at small firms, these were exploited by large Japanese corporations)

• Transnational Monitoring Units

Desire for greater transparency/information/ more data on TNC activities

Conclusion:

Japan’s economic crisis 1990s serves as a lesson for

(1). Industrial policy

(2). Concentration of corporate power

‘Strategic failure’

Parallels with crises elsewhere – USA & Europe, but also Soviet Union (state socialism) & Sweden (social corporatism).