THE 'ADJUSTMENT' OF THE WORLD ECONOMY
(by Róbinson Rojas Sandford)(1997)
The 'structural adjustment' of today's world economy, like in earlier
periods, is an interactive process between firms, markets and states.
The process, like in earlier periods, entails that the political
establishment serves the economic establishment, and the economic
establishment serves the most powerful capitals, the latter being, in
the second half of the twentieth century, what in general terms is
defined as 'transnational corporations'.( see BOX 1)
Both nationally and internationally, markets are dominated by groups of
transnational corporations, the latter creating an economic environment
where perfect competition does not exist, and, because of that, in many
aspects accumulation of capital becomes contradictory with accumulation
of social welfare and also contradictory with sustainable economic
development.
By and large, globalization is a transnational corporations affair.
"World Investment Report 1997" informed:
-"With an estimated $7 trillion in global sales in 1995 -the value of
goods and services produced by some 280,000 foreign affiliates-
international production outweighs exports as the dominant mode of
servicing foreign markets. The growth of global sales has exceeded
that of exports of goods and services by a factor of 1.2 to 1.3
since 1987". (World exports in 1995 were $5.1 trillion, and world
gross domestic product $27.8 trillion. UNCTAD estimates put the
ratio foreign/domestic sales of TNCs around 40%, thus, it can be
estimated that transnational corporations' good and services reached
around $17-$18 trillion, accounting for around 63% of world gross
domestic product. Considering that the top 100 transnational
corporations produced $ 5.0 trillion in 1995, which accounts for about
29% of TNCs' total, we have a case of heavy concentration of capital,
which should correlate with political power. Note by R.R.)
-"Foreign direct investment (FDI) continues to be a driving force of
the globalization process that characterizes the modern world economy.
The current boom in FDI flows, which has been accompanied by
increasing flows of foreign portfolio equity investments, underscores
the increasingly important role played by transnational corporations
(TNCs) in both developed and developing countries. This role has been
facilitated by the liberalization of FDI policies that has taken place
in many countries in recent years, as part of an overall movement
towards more open and market-friendly policies. However, reaping the
benefits of FDI liberalization requires not only that barriers to FDI
are reduced and standards of treatment established -the focus of most
FDI liberalization to date- but also that competition in markets is
maintained. This third component of FDI liberalization -maintaining
the proper functioning of markets in which TNCs invest- is the special
topic of this year's 'World Investment Report', which examines the
interaction between FDI, market structure and competition"...
MARKET STRUCTURE: FASTER CONCENTRATION
In the concluding remarks of their almost 400-page report, the
scholars in the United Nations, matching the intellectual dishonesty
shown by the scholars hired by the World Bank (see my former lectures),
argue that, in the first place, "the same competitive strength that
enable firms to expand their international production activities could,
under certain conditions, also create opportunities for TNCs to
eliminate competitors and assume dominant positions within markets,
leading to possible reduction in market efficiency, and to engage in
anticompetitive behaviour", but, then, in the second place, "in a
globalizing and liberalizing world economy, the number of actual or
potential entrants into foreign markets increases. This gives rise to
a greater potential for competition in markets regardless of their
geographical scope", never mind that "entry barriers are less the
outcome of government policies and more associated with costs and
know-how or technological advances", the main dynamic features of the
creation and development of oligopolic markets!
Never mind, also, that, when characterizing the FDI boom that began in
1995, the report states that there have been a "boom in intra developed
country mergers and acquisitions (M&A)", and that "even in the current
boom, cross border M&As, especially in the United States and Western
Europe, are playing an important role in boosting FDI"..."The value of
such M&As increased by 16 per cent in 1996, to $275 billion" (the
meaning of this figure is that $275 billion out of a total of $350
billion, or 79% of FDI in 1996 WAS DEDICATED TO CONCENTRATE CAPITAL
EVEN MORE!.
But there is more about the internal dynamic of the capitalist system
as reflected in the way in which transnational corporations develop. The
report adds:
"Complementing the increases in M&A and FDI flows, the number of
cross-border inter-firm agreements (equity and non-equity, other
than strategic research-and-development (R&D) partnerships) has
also increased. In 1995, nearly 4,600 such agreements were concluded,
compared with about 1,760 in 1990. These agreements take place
primarily between firms in developed countries: United States firms
participated in 80 per cent of them, European Union firms in 40 per
cent and Japanese firms in 38 per cent. Recently, firms based in
developing countries have also begun to conclude such agreements
actively. The number of cross-border inter-firms agreements (other
than strategic R&D partnerships) with developing-country firm
participation has increased in absolute numbers, as well as a share
of the world total (from 27 per cent during 1990-1992 to 35 per cent
during 1993-1995). Although there was a decline in 1995, the number
of strategic R&D partnerships (in core technologies, such as
information technologies and biotechnology), has also been rising
steadily since 1990. Again, developing-country firms assumed a
bigger role in strategic partnerships (3 per cent in 1989 to 13 per
cent in 1995), suggesting that these firms may have attained
sufficient technological sophistication and capacity to make them
worth having as partners".
A better picture about the above is given if we add that the largest
100 TNCs in the world, based in industrial countries, had foreign assets
in 1995 amounting to 1,700 billion, while the largest 50 TNCs based in
developing countries totalled only $79 billion in 1995, which is less
than 5%. Very much the case of "junior partners" in the 'strategic
partnerships'.
More transnationalization (more globalization) and more oligopolic
domination of the world economy have been the main feature of TNCs's
growth, which is consistent with economic theory. The World Investment
Report 1997 explains:
"Despite the growing number of small and medium-sized enterprises
"with investments abroad, a good part of FDI continues to be
"concentrated in the hands of a small number of companies. The
"largest 100 TNCs, ranked on the basis of the size of foreign assets,
"own $1.7 trillion assets in their foreign affiliates, controlling
"an estimated one-fifth of global foreign assets. In the United
"States, 25 TNCs are responsible for half of that country's outward
"stock, a share that has remained almost unchanged during the past
"four decades. For six out of nine developed countries for which
"such data are available, 25 TNCs account for more than a half of
"their respective countries' outward stocks. Both the top 100 TNCs
"worldwide and the top 50 developing-country TNCs are becoming
"more transnationalized, at a faster rate in the latter case".
(Foreign assets increased 30% per year in the period 1993-1995
for the largest 100 TNCs, and 280 per cent for the top 50 TNCs
based in developing countries. R.R.)
Moreover,
"The Triad (European Union, United States and Japan) is home to 87
"per cent of the top 100 TNCs and accounts for 88 per cent of their
"foreign assets. Likewise, China, the Republic of Korea, the Hong
"Kong Special Administrative Region of the People's Republic of
"China"..."and Mexico are home to 56 per cent of the top 56 firms
"based in developing economies, and account for two-thirds of their
"foreign assets"...
"...Electronics is the most important industry as far as the largest
"TNCs are concerned, accounting for some 16 per cent of all firms'
"foreign assets in each of the two lists of top TNCs. Automotive and
"chemical firms also feature prominenttly in both lists, but more so
"in the list of the top 100 firms. Petroleum and mining firms,
"although few in number, tend to rank high in both lists".
(It is important to remember that UNCTAD lists as 'pollution-intensive
industries' the following: chemicals, pulp and paper, petroleum and
coal products, and metal. R.R.)
TABLE 1 illustrates the process of concentration of economic power in
the world economy showing the following:
a) in 1968, the industrial countries (20) accounted for 72.7
per cent of total gross national product of the nation-states
listed as part of the 100 largest economic entities in the
world. By 1995, that share increased to 82.7 per cent;
b) in 1968, the value added of the TNCs included in the list (44)
accounted for 8 per cent of the total (gross annual sales plus
gross national product). By 1995, that share was 12 per cent.
c) gross annual sales grew 16.7 per cent per year from 1968 to
1995, while gross national product grew 11.4 per cent.
d) if we take the 50 largest economic entities, 8 of them were
TNCs in 1968, and 12 of them were TNCs in 1995. Also, in
1968, gross annual sales accounted for 3.5 per cent of the
total (gross annual sales plus gross national product), and
6.1 per cent by 1995. Moreover, gross annual sales grew at
an annual rate of 19.5 per cent, while gross national product
grew 11.3 per cent per year.
________________________________________________________________________
TABLE 1
RANKING OF COUNTRIES AND TRANSNATIONAL CORPORATIONS ACCORDING
TO SIZE OF ANNUAL PRODUCT: 1968 AND 1995
[A] [B]
Annual Annual
product* product*
Economic (billion Economic (billion
Rank entity dollars) entity dollars)
----------------------------- -----------------------------
1 United States 880.77 United States 6,952
2 U.S.S.R 228.45+ Japan 5,108
3 Japan 141.81 Germany 2,415
4 Germany, West 132.48 France 1,536
5 France 126.23 United Kingdom 1,105
6 United Kingdom 102.67 Italy 1,086
7 Italy 74.98 China 697
8 China, Mainland 68.80+ Brazil 688
9 Canada 62.44 Canada 568
10 India 44.32 Spain 558
11 Brazil 32.90 South Korea 455
12 Mexico 26.74 Netherlands 395
13 Sweden 25.57 Australia 348
14 Netherlands 25.23 Russian Federation 344
15 Spain 25.20 India 324
16 Poland 24.90+ Switzerland 300
17 Australia 23.14 Argentina 281
18 GENERAL MOTORS 22.76 Belgium 269
19 Germany, East 22.21+ Taiwan 260
20 Belgium 20.75 Mexico 250
21 Switzerland 17.16 Austria 233
22 Argentina 16.28 Sweden 228
23 Czechoslovakia 15.88+ Indonesia 198
24 Pakistan 14.55 ITOCHU 187
25 STANDARD OIL(NJ) 14.09 Denmark 172
26 FORD MOTOR 14.08 Thailand 167
27 South Africa 14.02 GENERAL MOTORS 164
28 Rumania 13.89+ MITSUI 163
29 Denmark 12.39 SUMITOMO 153
30 Turkey 11.60 MARUBENI 145
31 Austria 11.40 Norway 145
32 Yugoslavia 10.57+ Hong Kong 143
33 Indonesia 9.60+ FORD 137
34 ROYAL DUTCH/SHELL 9.22 South Africa 136
35 Hungary 9.20+ Saudi Arabia 125
36 Venezuela 9.11 Finland 125
37 Norway 9.02 MITSUBISHI 125
38 GENERAL ELECTRIC 8.38 EXXON 122
39 Iran 8.28 TOYOTA 112
40 Greece 7.55 SHELL 110
41 CHRYSLER 7.45 Poland 102
42 Philippines 7.21 Portugal 102
43 I.B.M. 6.89 HITACHI 95
44 MOBIL OIL 6.22 Israel 91
45 Colombia 6.10 Greece 90
46 Chile 5.82 NISSHO 89
47 Korea, South 5.82 Malaysia 85
48 Bulgaria 5.73+ Singapore 83
49 United Arab Rep. 5.69+ Ukraine 80
50 Thailand 5.56 Colombia 76
51 UNILEVER 5.53 Venezuela 75
52 TEXACO 5.46 Philippines 74
53 Nigeria 5.34 MOBIL 73
54 Portugal 5.01 DAIMLER BENZ 72
55 New Zealand 4.86 I.B.M. 72
56 Israel 4.67 GENERAL ELECTRIC 70
57 GULF OIL 4.56 Chile 67
58 U.S. STEEL 4.54 PHILIP MORRIS 66
59 Peru 4.22 MATSUSHITA 64
60 Taiwan 4.16 SIEMENS 62
61 I.T.T. 4.07 VOLKSWAGEN 62
62 WESTERN ELECTRIC 4.03 Ireland 60
63 STANDARD OIL (Cal.)3.63 Pakistan 60
64 MCDONNELL DOUGLAS 3.61 BRITISH PETROLEUM 57
65 DUPONT DE NEMOURS 3.48 Peru 57
66 Malaysia 3.34 New Zealand 57
67 SHELL OIL 3.32 NISSAN 56
68 WESTINGHOUSE ELEC. 3.30 CHRYSLER 53
69 BOEING 3.27 A.T.T. 51
70 BRITISH PETROLEUM 3.26 UNILEVER 50
71 STANDARD OIL (Ind.)3.21 NESTLE 49
72 R.C.A. 3.11 TOSHIBA 48
73 Algeria 3.00 Egypt 47
74 Morocco 3.00 Czech Republic 44
75 Ireland 2.98 ELF ACQUITAINE 43
76 Vietnam, South 2.98 SONY 43
77 I.C.I. 2.97 Hungary 43
78 GEN. TEL. & ELECT. 2.93 DU PONT 42
79 GOODYEAR 2.93 NEC 41
80 VOLKSWAGEN 2.93 FIAT 41
81 BETHLEHEM STEEL 2.86 Algeria 41
82 SWIFT 2.83 PHILIPS 40
83 Korea, North 2.82+ HONDA 40
84 LING-TEMCO-VOUGHT 2.77 United Arab Emirates 39
85 UNION CARBIDE 2.69 ENI 37
86 PHILIPS 2.69 RENAULT 37
87 GENERAL DYNAMICS 2.66 B.A.T. 36
88 Cuba 2.65+ TEXACO 36
89 EASTMAN KODAK 2.64 HOECHST 36
90 N.A. ROCKWELL 2.64 CHEVRON 36
91 BRITISH STEEL 2.62 GLAXO 35
92 Hong Kong 2.57 Romania 35
93 PROCTER & GAMBLE 2.54 BROWN BOVERI 34
94 INT'L HARVESTER 2.54 MITSUBISHI MOTORS 33
95 NAT'L DAIRY PROD. 2.43 PROCTER & GAMBLE 33
96 UNITED AIRCRAFT 2.41 HEWLETT-PACKARD 32
97 MONTECATINI/EDISON 2.32 B.M.W. 32
98 NATIONAL COAL BOARD2.30 ALCATEL 32
99 HITACHI 2.28 BASF 32
100 CONTINENTAL OIL 2.25 Morocco 32
----------------------------------------------------------------------
+ 1967, most recent data available
* The indicators used are gross national product for countries and
gross annual sales for corporations
[A]
Source: T. E. Weisskopf "American economic interests in foreign
countries: an empirical survey", Center for
Research on Economic Development, University
of Michigan, Discussion Paper 35, April 1974
as reproduced in M. Todaro, "Economics for a Developing World",
Longman, 1977, p. 342
[B]
Sources: World Development Report 1997, World Bank, 1997
World Investment Report 1997, United Nations, 1997
(Data processed by Dr. Robinson Rojas)
______________________________________________________________________
[A] 56 countries and 44 TNCs
[B] 52 countries and 48 TNCs (out of 133 countries)
______________________________________________________________________
INDUSTRIAL COUNTRIES AND FOREIGN DIRECT INVESTMENT
The industrial countries are the most important focal point for the
activities of transnational corporations, which is consistent with
textbook economics, because the size of markets (not as number of people
only, but as a combination of the latter with disposable income per
capita) will improve possibilities for maximizing profits.
There are some theories about why companies open up branches in foreign
countries. The most accepted is J. Dunning's 'eclectic theory' (see
J. Dunning, "The Eclectic Paradigm of International Production: A
Restatement and Some Possible Extensions", in 'Journal
of International Business Studies', Vol. 19, No. 1, 1988)
As summarized by `Berry, Conkling and Ray, in "The Global Economy.
Resource Use, Locational Choice, and International Trade", Prentice-Hall
International Editions, 1993, the eclectic theory assumes the following:
1) the host country must offer the TNC some advantage specific to the
country. These assets may be raw materials or domestic markets. But
these 'country-specific endowments' or advantages are presumably
more readily accessible to domestic firms in the host country than
to the TNC. Therefore, there is a second condition.
2) the TNC must have technologies, patents, or some other 'firm-specific
advantages' that are relevant to the country-specific endowments of
the host country. But the TNC could sell these assets to a domestic
firm in the host country.
3) there must exist, therefore, some market imperfections, which make
it difficult for the TNC to capture the true market value of its
firm-specific endowments, and which drive it to internalize these
assets by operating a branch plant in the host country.
In addition to the above, there other advantages for transnational
operation that apply to all TNCs regardless of their firm-specific
advantages:
a) protection from trade barriers and exchange rate variations;
b) achieving cross-regional product flows (i.e. "the three major
world markets, Europe, North America and Japan, tend to demand
different types of products and to have different images of what
constitutes luxury. So a TNC can produce regionally for the region
volume markets and export to the other two regions serving their
luxury niche. An example is the Honda Accord, marketed as a middle-
range, high volume automobile in the United States, and sold as a
luxury product in Japan" (Berry et al, 1993);
c) information about markets developed by superior economic strength
by TNCs in comparison to local firms;
d) information about business cycles (more often than not, the cycles
in each region of the Triad, and in individual countries in Europe,
are not synchronic) could maximize profits for TNCs by use of
cross-regional product flows;
e) increased local knowledge of the firm, making possible to boost the
sale of the TNCs products, whether locally produced or imported;
f) a large, stable home market;
g) highly efficient financial markets and transportation and
communication facilities;
h) "a generally supportive and stable government with a liberal attitude
towards mergers and industrial concentration" (Berry et al,1993);
i) comparatively low level of taxes and duties, and/or export processing
zones where manufacturing is free of duties and taxes;
j) access to free-trade zones;
k) to secure supply of raw material, intermediate goods, etc.
The above list assumes that transport costs will cancel advantages such
as huge differential in wages, reduced costs for polluting, and also
assumes that TNCs will not see as advantegous producing low quality
products, or even dangerous products, for foreign markets (i.e. food,
pesticides, fertilizers, medicines, etc)
Thus, even when rate of profits in less developed societies are higher
for TNCs, the trend will be to invest more in industrial societies.
TABLE 2 and TABLE 3 illustrate this point:
_______________________________________________________________________
TABLE 2.- RATE OF RETURN ON UNITED STATES FOREIGN DIRECT INVESTMENT
1974-1980
(percentage)
-----------------------------------------------------------------------
Country group and sector 1974 1975 1976 1977 1978 1979 1980 1981
-----------------------------------------------------------------------
Developed countries: 13.4 10.9 12.0 11.4 14.0 19.2 16.5 11.5
Petroleum 11.0 8.5 9.0 8.8 9.7 25.1 26.5 19.8
Manufacturing 14.0 10.6 12.5 11.8 15.1 18.4 12.4 8.2
Other 14.2 13.5 13.5 12.9 15.6 16.5 15.7 10.6
Developing countries: 53.6 29.1 25.5 24.9 23.9 32.0 24.3 22.5
Petroleum 133.3 288.5 124.3 113.6 81.6 144.9 50.7 49.0
Manufacturing 13.9 13.9 11.5 11.6 15.2 14.3 16.3 12.5
Other 20.9 18.7 19.8 18.2 18.4 21.2 20.8 18.0
_______________________________________________________________________
Source: U.S. Department of Commerce, SURVEY OF CURRENT BUSINESS, various
issues. In "Transnational Corporations in World Development. Third
Survey",United Nations Centre on Transnational Corporations,
United Nations, 1983
_______________________________________________________________________
_______________________________________________________________________
TABLE 3.- FDI INFLOWS, BY HOST REGIONS AND ECONOMIES 1970-1996
(in percentages of total -annual average)
-----------------------------------------------------------------------
1970-74 1975-80 1980-85 1985-90 1991-96
WORLD 100 100 100 100 100
Industrial countries: 80.6 74.1 74.6 82.3 64.8
European Union 50.0 35.5 30.7 37.1 38.1
United States 15.2 26.2 37.6 34.3 18.3
Japan 0.9 0.6 0.7 0.3 0.6
Developing countries: 19.4 25.9 25.3 17.4 32.3
Africa 2.1 3.9 2.8 2.0 1.7
Latin America/the Caribbean 11.3 14.6 12.1 5.7 9.6
Asia 6.0 7.4 10.3 9.5 20.6
of which:
China 0.0 0.1 1.4 1.9 9.9
Central and Eastern Europe 0.0 0.0 0.03 0.3 2.9
_______________________________________________________________________
sources: "Transnational Corporations in World Development. Third
Survey", UNCTC, United Nations, 1983
"World Investment Report 1992. Transnational Corporations as
Engines of Growth", Transnational Corporations and Management
Division, United Nations, 1992
"World Investment Report 1997. Transnational Corporations,
Market Structure and Competition Policy", United Nations
Conference on Trade and Development, United Nations, 1997
(Data processed by Dr. Robinson Rojas)
______________________________________________________________________
Table 3 is consistent with findings elsewhere that TNCs investment tend
to follow the business cycles. But, more importantly, the figures show
that even when transport costs are decreasing, the share of developing
countries other than China and Central and Eastern Europe is not
increasing desde 1975 (25.8, 23.6, 15.2, and 19.5) and just slowly
recuperating the levels before 1985 -the industrial world was
facing recession during the early 1980s-.
Probably, it will be adequate to comment here that TNCs investment is
reacting to the "enlargement" of the markets following the opening up
of the former bureaucratic socialist economies to capitalist relations
of production.
Table 4 shows locational tendencies for foreign direct investment
originated in United States, United Kingdom, West Germany and Japan
before 1985.
_______________________________________________________________________
TABLE 4.-
UNITED STATES: Flow of foreign direct investment by sector
1970-72 and 1979-81
(percentages)
Developed countries Developing countries
1970-1972 1979-1981 1970-1972 1979-1981
Primary industries 60.7 57.7 39.3 42.3
Manufacturing industries 85.0 72.3 15.0 27.7
Services 57.7 87.6 42.3 12.8
TOTAL 70.6 73.5 29.4 26.4
----------------------------------------------------------------------
UNITED KINGDOM: Foreign Direct Investment by sector, 1971-78
(percentages)
Flow, 1971-1978
Developed countries Developing countries
Manufacturing industries 81.9 18.1
Non-Manufacturing industries 81.4 18.6
TOTAL 81.7 18.3
----------------------------------------------------------------------
WEST GERMANY: Outflow of foreign direct investment, 1980
(percentages)
Developed countries Developing countries
Mining 95.2 4.8
Manufacturing industries 69.6 30.4
Services 94.5 5.5
TOTAL 80.7 19.3
----------------------------------------------------------------------
JAPAN: Outflow of foreign direct investment by sector,
1951-1980
(percentages)
Developed countries Developing countries
Mining 33.2 66.8
Agriculture, fishing 40.1 59.9
Manufacturing 33.1 66.9
Services 62.8 37.2
TOTAL 46.0 54.0
______________________________________________________________________
Sources: Table built by Dr. Robinson Rojas with data from tables
II.08, II.09, II.10 and II.11 in "Transnational Corporations
in World Development. Third Survey", UNCTC, United Nations,
1983
______________________________________________________________________
The case for Japan is unique due to its pattern of industrialization
after the Second World War. There is, nevertheless a trend, if we
take three periods (from the same source above).
JAPAN Regional Distribution. Foreign Direct Investments.
Annual average
1951-1966 1967-1977 1978-1980
Developed countries 33.1 43.3 49.4
of which:
United States 29.7 24.7 30.8
Developing countries 66.9 56.7 50.6
of which:
Asia 18.4 28.9 24.5
Latin America 28.6 17.6 16.9
----------------------------------------------------------------------
Japan's FDI in United States and Asia accounted for 48.1, 53.6 and
55.3 per cent of the total, which indicates heavy geographic
concentration, one led by the need of participate in the wealthiest
market in the world, and the other to secure supply of raw materials
and cheap manufactured goods in Japan's "sphere of influence", which
is East and South Asia.
In 1993, the World Investment Directory commented:
"The rapid growth in cross-border, intra-industry production among
firms based in the most developed regions of the world, driven by
technological and competitive forces, was the most important factor
behind the increased flows of FDI from and into those countries"...
"Among the developed countries, there is a further concentration of
FDI inflows and outflows within the three regions of the Triad (the
European Community, Japan and the United States). For the decade of
the 1980s, approximately 81 per cent of FDI outflows originated within
the Triad, and 71 per cent of FDI inflows were destined for the three
Triad members. The rise to prominence of the Triad is the result of
several factors. The growth of Japan as a significant outward investor
in the 1980s eroded the established positions of the United Kingdom and
the United States, the dominant investing countries in previous decades.
There has been a regionalization of markets in North America and Western
Europe, associated with the free trade agreement between the United
States and Canada and the pending North American Free Trade Agreement
(NAFTA), and the Single Market Programme of the European Community (EC)
and its extension to the European Free Trade Association (EFTA)
countries to form the European Economic Area. In particular, the
programme to further integrate the EC led to a rise in FDI into the
Community, both between member countries as well as from non-member
countries. In addition, the United States, with the world's largest
internal market and while in the midst of an economic recovery, became
an important recipient of FDI."
..."Traditionally, FDI in a number of industries (armaments, natural
resources, transportation, communications, insurance, financial
services, agriculture and new technologies) has been subject to tighter
restrictions than FDI in general...Within the OECD are in particular, a
process of liberalization and deregulation, targeted primarily at the
services sector, began in the 1970s and continued through the 1980s and
early 1990s, albeit with mixed results. Thus, while most restrictions
have been maintained in some industries such as transportation and
armaments, other industries such as banking and insurance have
experienced significant deregulation, with the effect of opening new
investment opportunities and allowing changing business strategies
across national borders".
Some European voices of protest rose against TNCs investment because
their monopolistic behaviour wasn't seen as positive.
M. Butler, writing in the Financial Times in January 1986, said:
"I have heard respectable people argue that it does not matter if
European high technology companies are taken over one after the other
by American or Japanese multinationals. If the market so decrees let
no man intervene!
"This needs to be thought through. The multinationals are in
Europe TO PROMOTE THEIR PARENT COMPANIES' strategy for gaining world
market share and MAXIMISING THEIR LONG-TERM PROFITS. As part of that
strategy they may do some manufacturing in Europe and even some
research. BUT THEIR POLICY IS DECIDED IN THEIR HEADQUARTERS AND THE
MAJORITY OF THEIR PROFITS FLOW THERE. Once they have knocked out or
taken over the European competition, they are free to shift the
balance of their investment in plant and research towards home OR TO
OTHER MARKETS YET TO BE CONQUERED. If Boeing in aircraft, or IBM in
information technology, can achieve a still more dominant world
market share than they have now, THE TEMPTATION TO BEHAVE LIKE
MONOPOLISTS WILL BE GREAT. European industry in other fields will
suffer. STILL MORE PROFITS, INVESTMENT AND RESEARCH WILL FLOW HOME.
BRAINS WILL FOLLOW THEM." (Click here for the complete text!)
By and large, the following is considered as the most damaging effect
on the market structure:
1.- the positive correlation between transnational corporation
activity and industry/market concentration
2.- the impact of foreign direct investment on host-country market
concentration: effects on concentration at-entry (starting a new
unit of production which will elbow out less
competitive units of production in the host
country), and
post-entry effects on market concentration
3.- anticompetitive business practices:
collusion
monopolizing mergers and acquisitions
exclusionary vertical practices ( controlling the
whole process
of production)
(see O. Sunkel, "The Transnational Corporate System")
predatory behaviour
4.- negative effects on balance of payments mainly due to 'transfer
pricing' (intra-firm trade to reduce tax payments in host
countries) (see TABLE 6)
5.- large sectors of FDI are concentrated on polluting industries
6.- as an outcome of the economic power in both their home and
host countries, TNCs tend to create 'political comparative
advantage' lobbying governments and even creating, changing and
toppling down governments. The literature on this is
overwhelming.
POLLUTION-INTENSIVE INDUSTRIES
World Investment Report 1992 had the following to say about the
"extent of transnational corporation involvement and influence" on
environmental quality:
"...TNCs tend to be more mobile and to have greater discretion in
the location of production than domestic firms, which suggests the
possibility that TNCs have greater leverage in negotiating favourable
environmental regulations, permits and exemptions with host countries.
"...TNCs are extensively involved in environmentally significant
activities. According to a recent UNCTC study ("Climate Change and
Transnational Corporations; Analysis and Trends", United Nations, 1992)
that focused on six major areas that contribute significantly to global
environmental problems and account for roughly 80 per cent of
anthropomorphic greenhouse-gas generation, TNCs have a large influence,
direct or indirect, in those areas. Among other things, they are the
primary producers and intermediate consumers of chlorofluorocarbons,
which are the principal cause of stratospheric ozone depletion and
account for at least 15 per cent of greenhouse-gas emissions. One
chemical company alone, E. I. DuPont de Nemours and Company, accounted
for 25 per cent of world production of CFCs. It has also been estimated
that the 20 largest international presticide manufacturers accounted for
94 per cent of world agrochemical sales in 1990 (UNCTC, "Contribution
of the Commission and the United Nations Centre on Transnational
Corporations to the work of the Preparatory Committee for UNCED", 31
March 1991, E/C.10/1991/3). Furthermore, TNCs are reported to have
extensive involvement in most pollution- and hazard-intensive
industries as measured by environmental control costs (UNCTC, "Environ-
mental Aspects of the Activities of Transnational Corporations: A
Survey", United Nations, Sales No.E.85.II.A.11, 1985)".
"...It is important to note...that the direct involvement of TNCs in
the production process of pollution-intensive industries, even if
adequately measured, provides only an incomplete description of their
role in determining environmental quality. Transnational corporations
exercise considerable influence on environmental variables through a
wide variety of non-equity relationships, which include turnkey and
plant-leasing operations, management contracts, subcontracting, supplier
relations, franchising, licensing, etc. As in direct production, the
non-equity relations of TNCs have positive or negative impacts. For
example, TNCs may choose to avoid responsibility by using subcontractors
for hazardous operations".
"...An early study on United States FDI in pollution-intensive
industries (chemicals, metal, pulp and paper, petroleum refining) found
that such investment went mainly to other industrial countries,
suggesting that United States FDI in developing countries was not mainly
in pollution-intensive industries (H. J. Leonard, "Are Environmental
Regulations Driving United States Industry Overseas? An Issue Report",
Washington, D.C., The Conservation Foundation, 1984)".
Table 5 shows how polluting some activities of TNCs are.
________________________________________________________________________
TABLE 5.- SHARE OF POLLUTION-INTENSIVE INDUSTRIES IN OUTWARD INVESTMENT
STOCK (percentage)
(P) = chemicals, pulp and paper, petroleum and coal
products, metal
Share of (P) Share of (P)
in total FDI in total FDI
in manufacturing
FRANCE (1989) 17 63
GERMANY, West (1989) 19 45
JAPAN (1989) 8 31
SWEDEN (1988) 18 24
UNITED KINGDOM (1987) 13 38
UNITED STATES (1990) 19 42
----------------------------------------------------------------------
SOURCES OF POLLUTION-INTENSIVE PRODUCTS IN WORLD TRADE
(percentage)
Source 1965 1975 1988
Industrial countries 78 78 74
Central and Eastern Europe 5 6 4
Developing countries 17 17 22
TOTAL 100 100 100
______________________________________________________________________
Source: "World Investment Report 1992. Transnational Corporations as
Engines of Growth", Transnational Corporations and Management
Division, United Nations, 1992.
Data processed and reorganized by Dr. Robinson Rojas
______________________________________________________________________
PRESSURES ON BALANCE OF PAYMENTS
Price transfering is a established activity by TNCs, which is achieved
through intra-firm trade. The purpose is to avoid taxation on profits
by the host country. This practice which has been massively researched
for the case of FDI in developing societies, is normally detected when
affiliates of foreign firms tend to import more than what they export,
creating a negative pressure on current account.
A telling example is the data for United States in Table 6.
_______________________________________________________________________
TABLE 6.- EMPLOYMENT AND FOREIGN TRADE OF US TRANSNATIONAL CORPORATIONS
AND US AFFILIATES OF FOREIGN TRASNATIONAL CORPORATIONS
1986-90
US TNCs Affiliates of foreign firms
All Ind. Manufacturing All ind. Manufacturing
-----------------------------------------------------------------------
Employment (thousands of workers)
1986 17,831.8 10,431.0 2,937.9 1,411.6
1987 17,985.8 10,195.9 3,224.3 1,542.6
1988 17,737.6 9,819.9 3,844.2 1,828.6
1989 18,721.0 10,138.4 4,511.5 2,138.6
1990 18,549.9 9,843.8 4,734.5 2,220.7
EXPORTS (millions of dollars)
1986 162,292 123,046 49,560 12,805
1987 169,239 136,854 48,091 15,487
1988 202,632 164,151 69,541 25,192
1989 223,352 179,885 86,316 31,873
1990 229,427 192,902 92,308 36,069
IMPORTS (millions of dollars)
1986 139,978 77,892 125,732 20,617
1987 156,748 86,616 143,537 24,546
1988 170,804 104,981 155,533 32,762
1989 181,095 110,425 171,847 40,871
1990 199,969 119,707 182,936 47,171
______________________________________________________________________
source: E. M. Graham and P. R. Krugman, "Foreign Direct Investment in
the United States", Institute
for International Economics,
January 1995.
______________________________________________________________________
Graham and Krugman (1995) comment on the above : "the data reveal a
significant behavioral difference: the affiliates of foreign firms
do show an apparent tendency to export somewhat less and import
significantly more than US firms -indeed, about twice as much".
And they add: "According to the table, in 1990 the typical foreign
manufacturing multinational imported approximately $21,000 worth of
materials per worker versus only $12,000 per worker for domestically
owned firms. In 1990 there were approximately 2.2 million US residents
working for foreign-owned manufacturers. This comparison suggests that
if these firms had remained domestically owned, imports in 1990 at any
given exchange rate would have been approximately $20 billion lower".
GLOBALIZED WORLD ECONOMY WITH STRONG STATES
Even when globalization, liberalization and deregulation call for a
rolling back of the economic role of governments, there is no ground
to assume that TNCs need to get rid of the state were their parent
offices are. On the contrary, TNCs need their respective states to
build artificial instances of comparative advantage through political/
economic means. TNCs need their home states to shield them against
other TNCs from other states.
World Investment Report 1994 puts it this way:
"The importance of the state in influencing the strategies, structures
and behaviour of TNCs and, therefore, the nature an extent of integrated
international production, lies in its dual role as 'regulator' of
specific activities and as 'container' of specific assemblages of
political, economic, social, cultural and institutional attributes"...
"governments can, and do, create, modify or even destroy comparative and
competitite advantages. In imperfectly competitive markets, first-mover
advantages, externalities and spillovers are still seen to require
governments to intervene in favour of their domestic firms. In some
countries, for example, in the United States, this has led to a growing
demand for a more strategic policy stance. This shift is particularly
evident with regard to high-technology industries that are seen to be at
the centre of a country's competitiveness. Within the broad tendency
towards greater deregulation, therefore, there are significant
differences between individual states. And despite the undoubted changes
that have occurred in its autonomy, the State remains a critical actor
in the organization of the world economy and a major source of continued
unevenness in the extent and form of integrated international
production".
Of course, relative economic, political and military strength of the
states involved in the new carving of the world economy, will pick up
winners and losers like in XIX century and the colonial stage in the XX
century. Tables 1 and 7 give an idea about relative economic power of
industrial societies' states vis a vis the rest of the world.
______________________________________________________________________
TABLE 7.- FDI OUTFLOWS, BY HOME REGION AND ECONOMY, 1985-96
(percentage)
1985-1990 1991-1996
World 100.0 100.0
Industrial countries 93.2 87.5
United States 13.9 23.3
Canada 3.1 2.3
Japan 17.9 8.5
United Kingdom 16.2 11.3
Germany 8.3 8.9
France 9.2 9.7
Netherlands 5.7 5.9
Belgium/Luxembourg 2.3 2.9
Sweden 4.6 2.0
Switzerland 3.2 3.4
The above 10 economies 84.4 78.2
Developing countries 6.8 12.5
China 0.4 1.1
Hong Kong 1.3 6.1
South Korea 0.5 0.9
Malaysia 0.2 0.5
Singapore 0.4 0.9
Taiwan 1.8 0.9
The above 6 economies 4.6 10.4
________________________________________________________________________
Data processed by Dr. Robinson Rojas from "World Investment Report 1997.
Transnational Corporations, Market Structure and
Competition Policy", United Nations Conference on
Trade and Development, United Nations, 1997
________________________________________________________________________
________________________________________________________________________
TABLE 8.- THE SECTORAL DISTRIBUTION OF INWARD FOREIGN-DIRECT-INVESTMENT
STOCK, 1990. INDUSTRIAL COUNTRIES
(percentages)
SECTORS
PRIMARY SECONDARY TERTIARY
Belgium/Luxembourg - 83.4 16.6
Denmark 1.9 29.7 68.4
France 1.4 32.0 66.7
Germany 0.1 36.3 63.6
Greece 7.2 72.7 20.1
Ireland 2.2 65.0 32.8
Italy 3.5 38.2 58.3
Netherlands 30.9 22.9 46.2
Portugal 7.2 38.2 54.6
Spain 3.6 50.4 46.0
United Kingdom 29.1 36.2 34.7
Austria - 56.3 43.7
Finland - 45.3 54.7
Norway 13.2 28.6 58.2
Sweden 0.1 41.9 58.0
Canada 4.0 63.3 32.7
United States 3.5 46.8 49.7
Australia 14.5 29.1 56.3
Japan - 63.9 36.1
______________________________________________________________________
Primary sector:
Agriculture, forestry, fishing
Mining and quarrying
Coal and petroleum
Secondary sector:
Food, beverages and tobacco
Textiles, leather and clothing
Paper
Chemicals
Coal and petroleum products
Rubber products
Non-metallic mineral products
Metals
Mechanical equipment
Electrical equipment
Motor vehicles
Other transport equipment
Other manufacturing
Tertiary sector:
Construction
Distributive trade
Transport and storage
Communication
Finance and insurance
Real estate
Other services
source: "World Development Directory. Developed countries", Volume III,
Transnational Corporations and Management Division, United
Nations, 1993
Table prepared by Dr. Robinson Rojas
______________________________________________________________________
______________________________________________________________________
BOX 1_________________________________________________________________
Necessary definitions:
a transnational corporation ( or multinational corporation ) is
defined in RROJAS RESEARCH UNIT as a group of corporations that
is operating in different countries but is controlled by its
headquarters in a given country. Transnational corporations
participate in international business -international business can
be defined as those business transactions among individuals, firms,
or other entities {both private and public} that occur across national
boundaries- through channels of entry including exporting, licensing,
franchising, TNC-owned foreign enterprises (joint ventures and wholly
owned subsidiaries), management contracts, and turnkey operations.
A TNC can manufacture products in a foreign country by signing a
licensing agreement with an independent foreign firm that obtains the
right to produce and sell the product in return for a modest fee.
Franchising involves granting permission to a foreign firm to produce
a product and to use its name, trademark, or copyright, in return for
a fee and royalties (based on a contract). A TNC may have part
ownership, which is a joint venture, or complete ownership, which is
a wholly owned subsidiary, of its foreign production and marketing
operations. In a management contract, a company provides managerial
assistance to another company in return for a fee. A turnkey
operation is an arrangement by which a TNC agrees to construct an
entire facility or plant, prepare it for operation, and then turn
the key over to the local owners, for a fee.
International business is dominated by the world's major
industrial countries. The United States is the world's major
exporter, the major investor, and the major recipient of foreign
direct investment (FDI) (year 1995). The United States' position as the
world's leading foreign investor has weakened over the
years, losing ground to countries such as Japan and regions such as
Western Europe.
_______________________________________________________________________
END BOX 1___________________________________________BACK_______________
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