Transnational companies and the financial crisis

Grazia Ietto-Gillies

Plan of presentation

Transnational companiesThe contexts of the crisis and TNCs’

developmentsKey developments in the economic environmentTransnational companies and financeAnalysis of the crisisWhere are we heading?

The transnational companyTNC

• Terminology• Activities• Specific characteristics• TNCs and control• Growth

• Theories

Terminology

Noun • Companies, corporations; enterprises, firms

Adjectives:• Multinational (MNCs)• International• Transnational

Specifics elements of TNCs

Ownership of assets abroad via FDI; in at least one foreign country

Direct business activities abroad

Ability to control those operations

Control

• Control as ownership: equity stake• Strategic and managerial control

Activities

• Trade: both imports and exports• Franchising• Licensing• Sub contracting• Joint ventures (JVs)• Foreign direct investment: greenfield or M&As

Growth and changes

In 1968-9 the total number of TNCs by the largest 14 investor countries estimated at 7276

In 2009 UNCTAD estimated it at 82, 000Sectoral and geographical changesSmaller TNCsGrowth in all modalities of operations

Theories of the TNC

• Pioneer work by Stephen Hymer 1960, published 1976

Many, many theories since. Possible to see two approaches in them:

• Efficiency approach: transnationality driven by costs considerations

• Strategy approach: transnationality driven by strategy towards rivals, labour or governments

The contexts

Technological context• Technology and cost of transportation• Technology and cost of personal

communications

Organizational context: linked to ICTs.It is affected by the ICTs and has lead to more

investment in ICTs

Organizational context

Three major strands of organizational innovation:

• Organization of production across countries• Division of production process in segments to

be sited in different countries and/or produced by different firms

• Involvement of satellite firms in production process organized and controlled by large firms as main centres

The political context

• 1960s and 1970s: confrontations between governments and TNCs. Nationalizations of foreign TNCs assets

• From 1980s to early 1990s: co-operation. Privatization with acquisitions by foreign TNCs

• 1990s and later: confrontation between various groups (NGOs etc) and TNCs

Key developments in economic, social and political environment (1)

• Deepening of cross-border activities via TNCs• Growth in cross border FDI and portfolio

Investment.• Large privatization programmes • Incorporation of Soviet Union and CEE

countries into market sphere• Rise of China, India, Brazil to world stage

Key developments in economic, social and political environment (2)• Slow growth since 1980 compared to post

WWII• Increasing financialization of economic

systems: Stock of financial assets as % of world output from 1.2 in 1980 to 4.4 in 2007

• Increase in inequality• Increase in debts of private, corporate and

state sectors

Some facts in macroeconomies

• Between 1979 and 2006 the top 1% of US earners share of GDP grew from 10% to 22.9%. For top 0.1%: from 3.5% to 11.6%.

• World economy grew in per capita at over 3% in 1960s and 70s but only at 1.4% since 1980.

• In US private investment as % of GDP declined from 18.5% in 1979 to 15.5% in 2007

TNCs and finance

• Many TNCs operate in the financial sector. In 2009 the world share of outward stock FDI of finance sector was 22%: underestimate

• Manufacturing companies diversify into services

• All large companies including TNCs involved in portfolio investment

• Most FDI via M&As

Analysis of the crisis(1)

• Crises as manifestations of mismatch between production, demand and distribution sides of the economy

• Technol. and organizat. developments led to increase in forces of production and therefore in potential capacity and potential output.

• Absorption problem: high demand needed to absorb potential capacity

Analysis of the crisis(2)

Aggregate demand: • Consumption: constrained by the changes in

income distribution. Few eproducts • Exports: world net export are zero • Private investment: constrained by low

demand and profitability issues• Government investment in large projects

(environment etc) constrained by politics

Where are we heading?(1)

Protectionist policies? Protectionism and FDIMore FDI as M&As to cut capacityChanges in geographical structure of FDI• More FDI from developing countries and from

state companiesRestructuring by TNCs may leave smaller

companies vulnerable

Where are we heading?(2)

Impact of internet on cultural industries

Internet and possible strategies by other agents: labour

Conclusions

TNCs are part and parcel of the crisisCrisis signals disequilibrium between

production, demand and distributionThey have to be brought into line to overcome

present crisis and to avoid future ones.Regulation of the financial sector is necessary in

order to channel more funds into real sector

References

Most material from: Ietto-Gillies, G.• 2005, Transnational Corporations and International

Production. Concepts, Theories and Effects, E. Elgar, chs 1,2.

• 2010, ‘The economic crisis of 2008 and international business. Can we say anything meaningful about future scenarios?’, Futures, 42, 9: 910-19, November.

• 2011, ‘The Transnational company and finance’ in Michell, J. and Toporowski, J. (eds), Handbook of critical issues in finance, Cheltenham: Edward Elgar.