From United Nations University
------------------------------------------------------------------------
25. TNC-Nation State interaction (1): TNCs and linkages
26. TNC-Nation State Interaction (2): TNCs and Market Structure
27. TNC-Nation State Interaction (2): TNCs and market structure
continued
28. TNC-Nation State Interaction (3): Taxation and Transfer Pricing
and their effects on income distribution
29. TNC-Nation State Interaction (4): Socio-Economic, Cultural and
Political Issues
------------------------------------------------------------------------
------------------------------------------------------------------------
25. TNC-Nation State interaction (1) TNCs and linkages
25.1 introduction and revision
a) linkages forged between TNC affiliates and other economic
agents in the host economy e.g. suppliers, customers,
competitors
b) TNC impact on market structure in which TNC affiliates
operate and, via this, the size and efficiency of
the constituent firms
c) TNC impact on government revenue (including an analysis of
transfer pricing and taxation)
d) TNC impact on life styles, the environment and indigeneous
culture
e) TNC impact on the international allocation of activity and
the economic relations between countries, and in particular
the parallel movement towards regional integration and
collective self-reliance
25.2 Linkages
a) TNC decisions to (i) buy out or make internally and
(ii) to produce or buy in host country or import. The
former decision will be influenced by
- the relevant costs and benefits of vertical
integration cf. buying from outside contractors;
of these, the comparative costs of production
and the extent and pattern of market failure
will be the key determinants
- the type of investment
- TNC strategy: ethnocentric or geocentric
- local technology capability
- host government policies
The latter decision will rest on price/quality/delivery
considerations; the risks associated with foreign sourcing;
comparative inventory costs; and the policies of host
governments (including non-tariff barriers)
b) vertical linkages (backward) via subcontracting
i) the nature and organisation of linkages and their role in
development processes; formal and informal linkages;
networks of linkages; the Japanese cf the US model of
establishing and sustaining linkages with suppliers;
industry and firm specific determinants of linkages
ii) the determinants of linkages involving TNCs and how
these may differ from linkages forged by domestic
firms (Lall for UNCTC 1981)
iii) costs and benefits of linkages: benefits include the
provision by the contractor of technical assistance,
information on raw material sources, financial aid,
help with costing and pricing, assistance in quality
control and inspection techniques and general
managerial and administrative support; costs include
possible adverse effects arising from the control
exerted over the sub-contractor by the contractor
c) vertical linkages (forward) through customers
i) the need for quality control e.g. in servicing of product
maintenance
ii) in case of linkages with distributors, the need to
ensure interests of seller are properly served
iii) in case of intermediate products, to ensure user is
properly utilising these products and has the
necessary modifications to design plant and equipment
or work processes
d) horizontal or lateral linkages
i) by example, competition, entrepreneurial initiative
and management philosophy
ii) the dissemination or diffusion of technology
iii) management/labour turnover
25.3 Host government policies towards linkages
a) tariffs and other import controls
b) investment incentives
c) subsidies to local suppliers
d) performance requirements
e) direct controls
f) support towards local technological and educational
infrastructure
25.4 Does it make a difference whether linkages are forged with
indigeneous firms or other foreign subsidiaries? The cases of
Japanese investment in electronics and auto industries
----------------------------------------------------------------------
Hirschman(1958) Reuber(1973) Lall(1981)
UNCTC(1981) Hill(1982) Landi(1986)
Newfarmer and Marsh(1981)
Katz ed.(1987) See Bibliography
----------------------------------------------------------------------
26. TNC-Nation State Interaction (2): TNCs and Market Structure
26.1 Introduction
26.2 The nature and functions of the market mechanism
Identifying and explaining the main types of market
structure, with particular reference to the sectors in
which TNCs dominate
26.3 The impact of TNCs on market structure in host countries
a) on the various components of market structure
i) number and size of firms; degree of market concentration
ii) product diversification
iii) vertical or horizontal integration
iv) barriers to entry
b) influences on market structure
i) country and industry variables
ii) forms of TNC participation e.g. by greenfield cf acquisition
iii) oligopolistic strategies pursued by TNCs (in LDCs)
c) regional and global market structures
i) the international market
ii) the role of international cartels (De Beers etc.)
iii) TNC consortia
d) particular features of market structure in LDCs; the role of
the state and family business
e) some particular problems associated with take-overs
26.4 The performance and behaviour of TNCs (or their affiliates)
(See also 22)
a) performance e.g. productivity and profitability, growth,
export and import performance innovatory capacity,
employment stability, adaptation to environmental change
response to government policies, etc.
b) behaviour: e.g. pricing strategy, product differentiation,
marketing tactics, cross penetration of markets among
international oligopolies, barriers to entry
c) the exercise of non-economic power
d) TNCs and structural adjustment; do TNCs adjust their
location, product, employment, etc. strategies in response
e.g. to technological change, more or less speedily than do
indigeneous firms?
e) implications of a) to d) for developing countries
26.5 The impact of TNCs affiliates on their competitors (See also 22)
a) to what extent will TNC activity have a salutary effect on
indigeneous competitors; and to what extent might it weaken
or destroy a local competitor?
b) the concept of 'virtuous' and 'vicious' competitive
cycles
----------------------------------------------------------------------
Lall(1978) Lecraw(1979a) Caves(1974 and 1982)
Dunning(1981) Long(1981) Newfarmer(1985) Jenkins(1987) chapter 3
OECD(1985) See Bibliography
----------------------------------------------------------------------
27. TNC-Nation State Interaction (2): TNCs and market structure
continued
27.1 Restrictive practices placed on activities of subsidiaries and/or
licensees of TNCs in LDCs
a) export restrictions (on what and how much is exported and to
whom?)
b) purchasing restrictions and/or requirements e.g. tied
purchases
c) limitaions placed on use of trade marks/patents etc.
d) control over pricing policies, including intra-firm
pricing (see 28)
e) restrictions imposed on production and innovatory activities
e.g. affiliate or contractee may not be allowed to produce
a competing or similar product
f) confidentiality requirements
27.2 Unilateral policies to curb unacceptable TNC practices
a) persuasive or mandatory policies related to entry or expansion
of TNCs
b) policies related to the conditions of production by
affiliates
c) policies encouraging countervailing capabilities by indigeneous
companies
d) general policies designed to remove distortions in domestic
resource allocation
27.3 Multilateral policies to curb undesirable TNC practices
a) harmonization and co-ordination of antitrust policies
i) technical feasibility
ii) political feasibility
b) agreement by host and home government on competition
policies
i) the role of arbitration and conciliation
ii) the convention on the settlement of investment
disputes
c) collection of additional information on TNCs' practices by
international agencies and government acceptance of common
disclosure practices
d) non-binding standards of behaviour
i) set up by the business community (ICC)
ii) set up by individual governments
iii) set up by international organisations
------------------------------------------------------------------------
Long (1981) Dunning(1981)
Contractor(1981) UNCTC(1984) UNCTAD(1988) See Bibliography
------------------------------------------------------------------------
28. TNC-Nation State Interaction (3): Taxation and Transfer Pricing
and their effects on income distribution
28.1 Introduction
a) why is transfer pricing an issue? 'Efficiency' and
'distributional' issues need to be separately identified
b) the particular problems when firms manipulate transfer
prices across national boundaries
28.2 Some theoretical issues
a) identifying effects of TNCs on income distribution
i) tax revenue
ii) economies of scale and externalities
iii) share of value added going to labour
b) important variables
i) market structure in which TNCs compete
ii) government policies
28.3 The concept of total value added and local value added
a) Total value added (tva)
i) TNC affiliate perspective: difference between gross
sales and purchases from other firms
ii) community perspective: difference between gross sales
and imports used to generate sales
b) Local value added: difference between tva and amount paid
for factor inputs supplied by non-residents
c) Factors affecting tva generated by foreign affiliates
i) type of activity
ii) efficiency
iii) monopoly power and/or monopsony (affecting price of
outputs and inputs)
iv) degree of integration with local economy
d) Factors affecting share of tva accruing to TNC
i) depreciation provisions
ii) fiscal incentives e.g. interest relief, investment
allowances, employment subsidies, etc.
iii) local tax rates
iv) extent of price manipulation in intra firm transactions
v) payments earned for services supplied bt parent
company
28.4 The determinants of tva: the role of transfer pricing
a) Opportunities for transfer price manipulation
i) intracompany trade in finished goods and/or raw
materials (see 21.5)
ii) intracompany trade in services, proprietary knowledge
and finance capital (see 21.4)
b) Motives for transfer price manipulation
i) internal considerations
- give support to claims for price increases by
showing higher costs
- record low profits in joint ventures
- transfer profits to low profit or loss centres
- indirectly allocate markets
- mollify claims for wage increases by recording
lower profits
- enlarge market share to detriment of competitors
ii) external considerations
- variations between countries in corporation tax
rates and imposition of import duties
- instability of exchange rates
- restrictions on dividend remission
- differentials in economic and political risk
between countries
- avoiding anti-monopoly charges
- avoiding anti-dumping charges
iii) voluntary abstention from transfer pricing manipulations
iv) tax authority control on transfer pricing manipulation:
e.g. Section 482 US IRS Code
28.5 Evidence of intragroup trade and transfer price manipulation
a) extent of intra group trade
b) alternative measures of transfer pricing practices
c) the Lecraw study of the import and export pricing practices
in TNCs in 5 ASEAN countries( Lecraw in Rugman and Eden(1985))
28.6 The consequences of transfer pricing
a) transfer price manipulation as an 'efficient' response to
market imperfections arising from government regulation
b) transfer price manipulation as an abuse of dominant
market power
28.7 implications for policy
a) unilateral policies
i) minimize possibilities or raison d'etre for transfer
pricing; e.g. reduce international tax differentials,
foreign exchange restrictions, price controls, etc.
ii) seek to control extent of transfer pricing
- break lines between parent companies and affiliates
by channeling imports and exports through an
independent agency
- taxing profits on evidence (other than declared
amounts) of arm's length (= competitive market)
prices
- force firms to charge arms length prices and requiring
more information about pricing methods used
- impose levies on QUANTITIES of products exported
or imported (e.g. as introduced by Jamaica on
bauxite, Costa Rica on bananas)
- publicise firms which do price at different than
arms length prices
- conduct a series of internal checks on firms
- better evaluation of arms length prices e.g. as
spelled out in section 482 of US Internal
Service Code
iii) in deciding between i) and ii) type policies,
questions if efficiency (for who and what purpose) and
international income distribution need to be
distinguished from each other.
b) multilateral policies
i) codes of conduct
ii) bilateral agreements by governments on pricing new
products or those which do not normally enter into
trade (e.g. engine for the Ford Pinto)
iii) the incorporation of misuse of pricing into either a
restrictive practices code or a GATT type agreement
iv) harmonisation of corporate taxes and treatment of
asset valuation, depreciation and deductions from
income
v) elimination of tax havens
28.8 Taxation
a) alternative tax treatment of TNCs: the unitary tax debate
b) consequences of government tax policies
i) share of value added
ii) attracting foreign investment
iii) intra-firm pricing practices
c) relevance to operations of TNC affiliates vs. national firms
- sensitivity of TNC affiliates to changes in taxation
in light of alternative investment opportunities
- the legal form of enterprise e.g. branch v. subsidiary;
joint venture cf 100% affiliate
- TNC affiliate ability to avoid national taxation shift
earnings
- ability of national government to enforce tax
compliance
- tax havens
- the role of different types of taxes (and tax
incentives) on the structure of FDI
d) bilateral tax treaties; the elimination of double taxation
e) harmonisation of corporate tax systems
f) the importance of 'getting the tax system right' for
developing countries in their bid to maximise the benefits of
inward direct investment; taxes as revenue raisers and policy
instruments; the comparative role of corporation value adding
taxes and import duties as revenue raising devices
-----------------------------------------------------------------------
Rugman and Eden(1985) Mathewson and Quirin(1979)
Lall(1973a) OECD(1979)
Vaitsos(1974b) UNCTAD(1977), Tang(1979)
Lecraw in Rugman and Eden(1985)
Casanegra de Jantscher & Mansfield(1989)
See Bibliography
-----------------------------------------------------------------------
29. TNC-Nation State Interaction (4): Socio-Economic, Cultural and
Political Issues
29.1 Introduction
a) the importance of these issues; but the limitations of economies
i) in their own right
ii) as factors influencing the interaction between TNC and nation
states
b) cultural differences in attitude and values, e.g., towards
work, authority, wealth creation and distribution, security,
human rights, etc)
c) cross country ideologies
i) individualism
ii) communitarianism -the main characteristics of each
d) the concept of entrepreneurial culture
e) how might TNC influence cultural values; possible areas of
gains and losses to developing countries
29.2 The impact of TNCs on political goals
a) How TNCs may effect national decision-making (i.e. through
lobbying, political clout, etc)
b) evidence of direct and indirect political involvement of TNCs
c) impact of TNC activity on the distribution of economic and
political power
d) issues of extraterritoriality
e) national and multilateral policies towards TNCs
29.3 The impact of TNCs on socio-economic goals
a) income and wealth distribution
b) consumer protection
c) Social change
d) environment and quality of life: pollution haven
i) TNC environmental management policies and practices
ii) national regulation of TNC environmental behaviour
iii) environmental issues affecting the location of
activity by TNCs
29.4 Other areas of TNC/Nation State interaction
a) Questionable payments
b) Human rights
c) TNCs in South Africa
d) TNCs in Chile
e) TNCs in Central America
29.5 Policies to encourage the social responsibility of TNCs
-------------------------------------------------------------------------
Gladwin and Walter(1980) UNCTC(1985, 1983, and 1978)
Vernon(1971 and 1977)
Rojas(1971, 1973, 1975, and 1985)
United States Senate(1975)
Special issue of Journal of International Business Studies Vol. XIV,
Fall 1983, No.2) See Bibliography
-------------------------------------------------------------------------
RRojas Research Unit/1996
|
