Policy and Political Theory in Trade Practice

Multinational Corporations and Global Governments

N. Anguelov

• Publisher: Palgrave Pivot
• Year: 2014
• ISBN:
  9781137398369
• Topic: Politics & International Relations
• Subtopic: European Politics
• Index: Politics & International Relations

The book seeks to untangle the complexities of how America and the West work within emerging markets, addressing the political and diplomatic implications of investment alongside emerging theory within IPE and its implications for the USA.

1

Globalization Yesterday and Today: Changes Matter

Abstract: Globalization’s impact on changing firm and market characteristics is discussed. The focus is on growth and proliferation of MNCs and their FDI. The chapter defines what an MNC is, what it does, how it is created today, where, and how it operates. The chapter outlines the differences between modern day global enterprises and the MNCs of the recent past.

Anguelov, Nikolay. Policy and Political Theory in Trade Practice: Multinational Corporations and Global Governments. New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137398369.0003.

Few would argue that globalization defines economic activity today. Globalization has emerged as a comprehensive term describing the process of international market integration and consumer preference convergence (Townsend, Yeniyert, & Talay, 2009). Those two factors vary in degree and magnitude across countries. The general trend of convergence is accompanied by a process of location specific strategies that firms employ to maximize global customer satisfaction. The success of that process is dependent on market access. Therefore, the creation of market integration policies has magnified and continues to develop, driven by the economic interests of firms. As their assets continue to internationalize, firms continue to push for the dismantling of political barriers to trade. The increased lessening of political barriers to international trade has been greatly aided by the technological advances that have lowered the costs of transportation and communication globally. These factors have shaped the expansion of the geographic scope of markets (Adams, G., 2008; Ward, Bhattarai, & Huang, 1999).

As market expansion has magnified, firms have transformed from national to multinational to transnational. The difference between multinational and transnational firms is in the concept of “born-global” (Cavusgil & Knight, 2009; Knight & Cavusgil, 1996, 2004). Born-global is the platform of new firm formation today. From their onset, modern new enterprises are not bound by national boundaries but are rather the creation of fluid international partnerships with multiple investors, stake holders, and supply chains.

A multinational corporation has traditionally been viewed as the natural progression of a national corporation that has internationalized sufficiently and gone global (Johanson & Vahlne, 1977). This process was achieved through many means—from building subsidiaries overseas to the extent that business operations from them become just as, if not more, valuable than home-country operations, to acquiring foreign corporations through strategic merger and acquisitions (M&As). Born-global firms on the other hand are created international from the start. Even though headquartered in a particular country, their assets, commercial activities, and ownership are significantly internationalized. In that fact, born-global firms have a nationality but not a defined national ownership. In addition, many such firms seldom own any factors of production, such as factories or research and development facilities, but rely heavily on subcontracting from independent suppliers.

Characterized by high knowledge-intensive components and a great degree of added value from specialized services such as design and marketing, born-global firms produce fast moving consumer goods (FMCGs) or consumer services. Examples are consumer products, electronics, home products, clothes, foot and outerware, cosmetics and fragrances, prepared foods and supplements, as well as telecommunications service platforms and cloud computing. The born-global concept describes such conglomerates as Liz Claiborne, Nike, electronics giant Logitech, and the all-indispensable Skype.

With the intensification of globalization and the increasing diversification of corporate holdings the term that has emerged to best describe this pervasive internationalization of assets and operations to include the subtle, if not contentious, difference between “multinational” and “transnational” is global enterprise. Global enterprise denotes that even if a firm started as national and has grown to multinational, it is no different in its global market reach and positioning than a born-global firm. Still, the preferred common name of global enterprise is a multinational corporation. The general public understands the concept through that name and there is also a legacy component for its endurance. Much of the policy discussion and academic literature of the past three decades for and against globalization has centered on the dealings of MNCs or MNEs—multinational enterprises.

An MNC can be viewed as a network of activities located in different countries (Kogut & Kulatilaka, 1994). Those activities include all aspects of production. Today they range from research and design to prototyping to partial assembly to finishing, packaging, warehousing, distribution, and customer service. MNCs not only sell in foreign markets but many also control foreign firms. For example, American General Motors (GM) owns 50.9% of GM Daewoo in Korea; German Daimler owns 85% of Mitsubishi Fuso in Japan, and French Renault owns 70.1% of Renault Samsung in Korea. Renault also owns 44.4% of Nissan in Japan and Renault’s CEO serves as Nissan’s CEO (Ishikawa, Sugita, & Zhao, 2008). Such interconnectedness blurs national economic interests and challenges conventional economic classifications of imports, foreign assets, and exports. Firms can simultaneously export to a market and export from it. For example, GM is the 100% shareholder of Opel in Germany and Saab in Sweden, as well as a partial shareholder of Daewoo in Korea and Suzuki in Japan. GM exports its Opels from Germany mostly to the rest of continental Europe and parts of Asia, Saabs from Sweden mostly to the United States and Europe, Daewoos from Korea to the United States and Asia, and Suzukis from Japan to the United States, Asia, and Europe. At the same time, GM exports its Chevrolets, Buicks, and Cadillacs directly to all those countries.

MNCs and their products defy nationality, but their ownership does not. Covertly or openly, hostile attempts to acquire foreign competitors get much coverage in the press and have reopened a debate on the ownership of global firms. That debate stems from discourse over the measures governments take to protect their firms from hostile acquisitions. Such support is not permitted under the World Trade Organization (WTO) antitrust rules (Zweifel, 2006). However, governments find ways to skirt WTO antitrust regulations. For example, since 2009 Japan Airlines (JAL) has been fighting hostile takeover attempts and has been able to ward them off with the help of its government. American Airlines (AA) has most aggressively been trying to buy the ailing JAL to gain access to the lucrative and growing inter-Asian rout market. Currently, JAL is the only airline that serves that market, which is the fastest growing in the world thanks to the increasing amount of domestic flights within China. AA has publicly accused the Japanese government of unfairly protecting JAL, but it has not been able to convince the US government to file a complaint with the WTO. The Japanese Ministry of Land Infrastructure Transport and Tourism formed a task force to aid the ailing airline, mostly by extending it government backed lines of credit in order for it to be able to fight off hostile takeover attempts by AA, Delta, and Air France.¹ The negotiations are still ongoing while JAL is in bankruptcy, with the decision-making process now steered toward minority share merger with American Airlines. The Japanese government continues to extend lines of credit to JAL to keep it solvent, while its task force is restructuring the company.²

When Belgian Inbev attempted to acquire American Anheuser-Busch, maker of Budweiser—“the all American lager,” among the many antitrust questions surrounding the deal was its impact on overall US commercial interests. The US Department of Commerce’s US–China Business Council argued that it was important for US interests to keep Anheuser-Busch American. It was the firm’s growing operations in China that were helping it fight off the hostile takeover and those operations were essential for a healthy US–China trade relationship. Eventually the takeover went through after antitrust queries by the American, British, and Chinese governments.

When American Hershey and Kraft were in a bidding war to acquire British Cadbury in a quest to gain access to Cadbury’s leadership market position in Asia, there was a huge public outcry in the United Kingdom about the national ramifications of the deal and its impact on British pride and economics. The debate even involved Prime Minister Gordon Brown and his main challenger Nick Clegg. While running as one of the challengers in the reelection of Mr Brown, Nick Clegg was critical of Mr Brown’s decision to use federal funds to help Cadbury fight the hostile takeover. Mr Brown retaliated by questioning Clegg’s patriotism and commitment to the protection of British pride and commercial interests.

Although such examples elicit discussion in the media, many economists believe a multinational corporation’s nationality is unimportant. “You want the jobs in the country, but it ultimately doesn’t matter who owns the firms,” says Nicholas Bloom, a Stanford University economist, who studies MNCs. Robert B. Reich, the Labor Secretary under President Bill Clinton, agrees: “Nationality matters almost not at all today.” These quotes are from 2008 Businessweek cover story.³ The argument is that most of the benefits accrue to the host rather than home nations, as MNCs tend to reinvest earnings into the local economy. This is a result of liberalization policies that encourage reinvestment rather than repatriation of corporate profits through better tax incentives (Slemrod, 2004). Such policies have eased international trade restrictions and have been gradually magnified by governments for decades. Reinvestment tax incentives have become a competitive tool governments employ to attract FDI and also to negotiate the degree to which they open their borders to imports. The more foreigners want to gain access to your market, the more willing they would be to agree to policies that keep their earnings from going back home. No firm would easily make a decision to keep profits tied up, particularly a publicly held corporation beholden to its shareholders, which is what most MNCs are. Shareholders need to see value translated into dividends back home. The trade-offs of this process have shaped the way MNCs are evaluated. Their stock values have become heavily dependent on total profits from global operations. Therefore, it is essential for them to operate globally with ease and that ease has been gradually achieved through a path of trade liberalization policies (Dunning, 1996, 1998; Gorg & Greenaway, 2004).

Liberalization policies have impacted all nations and define modern globalization (Barnett & Finnemore, 2004; Wolf, 2004; Zweifel, 2006). Since the creation of the General Agreement on Tariffs and Trade (GATT), the precursor of the World Trade Organization, policies of liberalization, privatization, and deregulation have shaped international trade (Zweifel, 2006). Global antitrust guidelines, in particular, have been strengthened with the creation of the WTO, which discourages governments from supporting MNCs. The whole point of deregulation is a global free and competitive private market not distorted by government intervention. The WTO provides measures for filing antitrust claims under its trade distortion clause (Barnett & Finnemore, 2004; Morici, 2000; Zweifel, 2006). Plaintiffs can file complaints based on evidence that a government’s financial support for a particular firm or industry is strong enough to allow for unfair price competitive positions to develop. The beneficiary of such a scenario would be able to undercut other competitors to such a degree that a significant change in trade patterns results. A trade distortion complaint can have legal standing only if a change of law occurs ex-post joining the WTO and is found to have trade distorting results (Barnett & Finnemore, 2004). S the WTO find such a violation, the plaintiff nation gets retribution by being granted permission to impose retaliatory sanctions of its choice (Zweifel, 2006). This policy ends up resulting in further trade distortions, not only for the two disputing nations, but also for their major trading partners.

Trade distortion discourses stem from the fact that antitrust policies vary from country to country, as do the ways in which governments support their firms. For example, unlike most Western nations, China does not allow outright acquisitions by foreign firms or nationals of Chinese businesses (Estrin et al., 2009; Midler, 2009). Mergers are allowed only in the form of joint venture partnerships where the majority of control lays with the Chinese partner. In most cases, the Chinese government owns the partners (Buckley, Wang, & Clegg, 2007). The same is often true for Russia, the former Soviet republics, and some East European nations (Dadak, 2004; Jeffries, 2004). Yet, firms from China and Russia are allowed to acquire any other entity in most of the rest of the world, which could lead to unfair competitive positions. This policy asymmetry provides protection for their firm from foreign competitors at home, while it allows for free asset, technology, and knowledge acquisition abroad.

The US Department of Commerce and the US International Trade Commission are critical of such protectionist policies and are calling for a property right liberalization reform, particularly in China.⁴ However, at this point their calls have no legal implications. According to WTO directives, WTO member nations are free to set their own foreign ownership laws. And foreign firms are free to choose not to do business in nations where those laws are not suitable. But is that really a choice today when increasing overall profitability of firms is dependent on global market share, which firms built through their internationalization. To increase internationalization, firms must continuously expand in foreign markets. For these reasons, Morici (2000) called for the creation of an international body for antitrust regulation that would incorporate in a coherent way the major aspects of the three main antitrust legal systems—the American, the European, and the Japanese. Morici shows that the three have significant differences in the way governments support their own MNCs. He proposes the creation of supranational legislation to address the difficulties of reconciling the three legal systems. To this day, no such legislation has been created. The WTO still adjudicates disputes on per-case basis. This policy does not allow for precedents to be created. With the growth of international linkages in production, investment, and trade, disputes are becoming harder to resolve, take years in quasi-litigation, and end up not having an impact, even after adjudication.

As a response to trade liberalization, a more recent trend has been noted of increasing special protection policies, particularly in industrialized nations (Bagwell & Staiger, 1990). This phenomenon of macro liberalization and micro protectionism has been described as managed trade (Dixson & Moon, 1993). Managed trade theory claims that MNCs lobby their own governments for special protection, while at the same time apply pressure on the governments of their trading partners to increase free market access. Success in this process allows MNCs to establish their preferred platforms both in production and in policy. Examples of favorable policy platforms are preferential tariffs, production subsidies, and exemption from regulatory compliance (Kogut, 1985; Ishikawa, Sugita, & Zhao, 2008; Schofer & Hironaka, 2005). In some cases, large MNCs can engage in such prolific production and sales interplay that they can cartelize entire industries while extracting both economic and political rents (Kogut & Zander, 1993).⁵

It has long been noted that being large and multinational enables firms to establish preferred technical standards and protocols across borders. In that way, they amass global brand equity (Kogut, 1985). Brands play a critical role in determining firm performance (Eisingerch & Rubera, 2010; Gammoh, Voss, & Fang, 2010).

Global brands are the face with which firms portray an image to a diverse customer base (Townsend, Yeniyert, & Talay, 2009). Global brands enhance economies of scale and scope, especially in manufacturing and research and development activities (Strizhakova, Coulter, & Price, 2008. For consumers, they create an imagined global identity, which has fueled the proliferation of a global consumer culture (Park & Rabolt, 2009; Strizhakova, Coulter, & Price, 2008).

For MNCs, global growt...

Table of contents

• Cover
• Title
• 1  Globalization Yesterday and Today: Changes Matter
• 2  Theoretical Gaps: How Existing Theories Fall Short When Assumptions Change
• 3  How Multinational Corporations Affect Economic Growth Today: A Legacy of Research and Theoretical Reasoning in Turbulent Times
• 4  Methodological Exercise
• 5  Purchasing Innovation Globally: Mergers and Acquisitions in Knowledge Sourcing
• 6  The Trade Policy Process in the United States: Reversing a Legacy of Liberalization?
• 7  Double Competition for FDI in the United States: Is It Worth It?
• 8  Policy Implications
• References
• Index