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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
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,

    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

    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
     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

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
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

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

    b) purchasing restrictions and/or requirements e.g. tied

    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

    c) policies encouraging countervailing capabilities by indigeneous

    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
      i) the role of arbitration and conciliation
     ii) the convention on the settlement of investment

    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

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)
         - 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
      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
         - ability of national government to enforce tax
         - 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

    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