The Politics of Multinational Corporations 9 MNC alter the nature of economic decision making Regulating Multinational Corporations In the developing world exporters Most developing countries entered the postwar period as primary commodity producers and Foreign corporations to control critical sectors raised political and economic concerns o Incongruent to achieve political independence from colonial powers and yet continue to struggle under the economic dominance of the colonial powers multinational firm o Economic concerns arose as gov t import substitution industrialization strategies Prohibited MNC ownership of utilities insurance banking and iron and steal Many gov t required local affiliate to be majority owned by local shareholders instead of having the MNC own 100 Gov t also imposed performance requirements on local affiliates in order to promote a specific economic objective Brazil made sure that MNC produced the majority of its products in their country Taiwan and South Korean gov t created export processing zones to attract investment o EPZ are industrial areas in which the government provides land utilities a transportation infrastructure and in some cases buildings to the investing firms usually at subsidized rates Foreign firms are allowed to import components free of duty Output must be exported Way of liberalizing foreign investments Regulating Multinational Corporations in the Advanced Industrialized Countries Typically more open to FDI less inclined to regulate the activities of MNCs than the typical developing country Only Japan France required explicit gov t approval fro manufacturing Developed countries prohibit MNC ownership of some sectors Gov t officials feared that Japanese firms would be unable to compete with MNCs if FDI was fully liberalized o Had restriction on inward development Designed to encourage technology transfers o In todays economy Japan is more open to foreign direct investments Sovereign Wealth Funds Need to know much about it Bargaining with Multinational Corporations Many host countries try to restrict MNC activities but few can dictate the terms under which MNCs invest The more the host country has exclusive control over things of value to the MNC the more bargaining power it has o Vice versa In natural resource investments bargaining power initially favors the MNC o MNC bears all of the risk Over time bargaining power shifts to the host country in a dynamic way o Called obsolescing bargain when the MNC cannot easily remove its fixed investment from the country so the investment becomes a hostage MNC enjoys more bargaining power than host countries in low skilled labor intensive manufacturing investments o Unlike natural resource investments manufacturing investments do not become hostages and host countries do not gain power once the investment has been made Locational incentives packages host countries offer to MNCs that either increase the return of a particular investment or reduce the cost or risk of that investment o Host countries offer 2 types of incentives 1 Tax incentives a Granted a reduced corporate income tax rate b Or tax holidays period of 5 years where firms don t pay tax 2 Exempted from import duties 3 Allowed to depreciate their investments at accelerated rates 4 Allowed substantial deductions from their gross incomes 5 Also offer MNCs direct financial incentives a Subsidized loans The growing use of locational incentives suggests that host countries are at a disadvantage when bargaining with MNCs over manufacturing investments Few gov t have allowed foreign firms to operate w o any restrictions Advanced industrialized country has been less inclined to try to restrict the activities of foreign firms than has the typical developing country A few factors account for this 1 Developing countries have been most vulnerable to foreign domination a Advanced industrialized countries have larger and more diversified economies than the developing countries i Foreign affiliate will face competition from domestic firms in an advanced industrialized country than in a developing country b FDI in developing countries was concentrated in politically sensitive natural resource industries c FDI in developed countries flowed into manufacturing industries 2 Correlation b w a country s role as a home for MNCs and its policies toward inward FDI a US UK are biggest investors 3 Fundamental differences in how gov t approach states intervention in the national economy a 2 gov t that were most restrictive toward FDI Japan France were also the 2 gov t that relied most heavily on industrial policies to promote domestic economic activity b Attempt to regulate MNC activity were most likely in countries where gov t played a large role in the economy The International Regulation of Multinational Corporations No international rules governing the activities of MNCs Reason why o Conflict b w the capital exporting advanced industrialized countries the capital importing developing countries has prevented agreement on such rules International rules governing FDI based on 4 legal principles 1 FI are private property to be treated at least as favorably as domestic private property 2 Gov t have a right to expropriate FI but only for public purpose 3 When a gov t does expropriate a FI it must compensate the owner for the full value of the expropriated property 4 FI have the right to appeal to their home country in event of a dispute with he host country Latin American gov t challenge the right of foreign gov t to intervene in host countries in support of their firms Calvo doctrine argues that no gov t has the right to intervene in another country to enforce its citizens private claims International Trade Organization Experience is important for 2 reasons 1 Failure of the ITO meant that there would be no international rules governing FDI 2 The failure of the ITO reflected a basic conflict that has dominated international discussions about rules regulating FDI to this day Developing countries sought international recognition of their right ot exert full control over all economic activity within their territories Sought passage of the UNITED NATIONAS RESOLUTION ON PERMANENT SOVEREIGNTY OVER NATURAL RESOURCES IN 1962 Failure to achieve a more extensive agreement in the Uruguay Round led the advanced industrialized countries to begin negotiation on a Multilateral Agreement on Investment in the OECD MAI was intended to further liberalize FDI to provide greater