Lecture 5: Transnational production

This week
• What is transnational production?
• developments and characteristics
• Transnational corporations (TNCs)
• Theoretical perspectives on transnational production
• liberal, realist/nationalist, critical
• Some key production-related issues
• beneficial or harmful – for whom?
• the state-TNC relationship
• regulation – by whom towards what end?

What is transnational production?

• Transnational production
• the act of producing goods/services extending beyond the boundaries of the
nation-state
• Foreign direct investment (FDI)
• ‘investment made outside the home country of the investing company in
which control over the resources transferred remains with the investor’ (p.150)
• Outsourcing across borders
• ‘the reallocation of a particular task from within one firm to another [located
in a different country], and the two [firms] are usually separated by having
different ownership’ (Thun, 2011:348)
• Global commodity chains (GCC)
• a cross-border ‘network of labor and production processes whose end result is
a finished commodity’ (Gereffi & Korzeniewicz, 1994:2)
• Global production circuits & networks (Dicken, pp.13ff.)
• economic processes considered to be circuitous (rather than linear), and
individual production circuits considered to be ‘enmeshed in broader
production networks of inter- and intra-firm relationships’ crossing nation-
state borders

Transnational production (brief overview)

• 16-18th centuries: some foreign investments on the part of large trading companies
(coordinate cross-border trading)
• 19th century: more sustained and longer-term investments outside of home country
(primarily portfolio investments)
• Spectacular growth in FDI after 1945
• grown much faster than both international trade and world GDP since 1985
• growing importance of mergers and acquisitions (brownfield FDI) since 1990
• overall decline in the share of FDI in the primary sector, and increase in the
share of FDI in the service sector
• FDI flows has been quite unstable since the global financial crisis (2008-)
• Origin of FDIs
• most from advanced industrial countries; increasing share from some
developing countries
• Destination of FDIs
• most to advanced industrial countries; increasing share to some developing
countries; very uneven distribution
 • Big differences in the relative importance of FDI for different countries

Globalisation of production?
• Definition
• ‘the proliferation and stretching of corporate activity and business networks
worldwide’ (p.155)
• Claim
• ‘transnational production is not new, but its magnitude and the degree of
fragmentation of the global value chain is new’ (Thun, 2011:347) – this, to the
extent that we today can talk about the existence of a functionally integrated
global production system (deep integration)
• Driving forces
• structural changes in technology, transport and communications, and finance
• government policies (overall liberalisation; FDI-led development strategies)
• changing organisational forms and strategies of firms (TNCs)
• How globalised is production as of today & what are the future prospects?
• consider different sectors of economic activity

Transnational corporations (TNCs)

• Definitions
• ‘a firm that owns and controls production (value-added) facilities in two or
more countries’ (p.151)
• ‘a firm that has the power to coordinate and control [production] in more than
one country, even if it does not own them’ (Dicken, p.198)
• TNCs (ownership)
• 103,786 parent companies with 892,114 affiliates in 2010
• employed 75 million workers in 2014
• share of value-added of foreign firms in world gross domestic product (GDP):
10 per cent (2013)
• share of value-added of the 100 largest TNCs in world GDP: 4 per cent (2008)
• TNCs (control)
• Nike has about 20,000 direct employees; products manufactured by more than
500,000 workers in over 700 factories in 51 countries
• Gap buys clothing from 700 suppliers that own and operate 3,000 factories in
50 countries
• Note: TNCs are highly differentiated (not all of one kind)

Explaining transnational production (liberal theory)

• Raymond Vernon and the product life cycle
• John Dunning’s ‘eclectic’ OLI-paradigm:
• Three conditions for a firm to engage in transnational production
• Ownership-specific advantages
• (in)tangible resources owned by a firm which grant it a competitive advantage
over its industry rivals
• Location-specific advantages
• factors that affect the desirability of host country production relative to home
country production
• Internalisation advantages
• advantages that make it desirable for a firm to produce a good or service itself,
rather than contracting with other firms to produce it
Explaining transnational production (other theories)
• Realism/nationalism
• encouraged to do so by home governments that see the national interest, power
and/or prestige served by national firms being engaged in transnational
production
• Critical (neo-marxist)
• desire to maintain monopoly power through the control of assets
• attempt to exploit foreign markets in order to increase profits

What has enabled firms to engage in transnational production?

• A liberal focus on ‘firm motivation’ is not sufficient
• no matter how motivated a firm is, other factors can either enable or disenable
it from engaging in transnational production
• Enabling factors
• technological developments
• transportation technology
• information and communications technology
• government policies
• liberal policies regarding FDI, trade and capital flows in general

Is FDI beneficial or harmful for host countries? - positive case (liberalism)

• Positive direct effects of FDI
• provides additional resources and capabilities (capital, technology, managerial
skills, market access)
• provides additional tax revenues
• increases GDP and the tax base
• advances economic growth by fostering a more efficient division of labour
• improves the balance of payments
• Positive indirect effects of FDI
• injects entrepreneurship, new management styles, new work cultures, and
more competitive practices
• helps upgrade the domestic resources and capabilities, and the productivity of
local firms; fosters cluster formation
• enhances national welfare in various ways...

Is FDI beneficial or harmful for host countries? - negative case

• Negative direct effects of FDI
• transfers too few and/or the wrong kind of resources or assets
• uses transfer pricing and other devices to lower taxes paid
• promotes a division of labour that can be detrimental to the country’s
comparative advantage
• worsens the balance of payments
• Negative indirect effects of FDI
• fails to accommodate to, or where appropriate, change local business culture
• limits the upgrading of local resources and capabilities
• may cause unrest by introducing conflicting values
• may exercise direct interference in the political regime or electoral process of
host country
• More generally
 • FDI can undermine the power and security of the nation-state
(realism/nationalism)
• FDI is internal to exploitation (transfer of profits) and undermines the
development of indigenous economic activity serving local needs (neo-
marxism)

Is FDI beneficial or harmful for host countries? - it-all-depends case (textbook)

• The costs and benefits of FDI vary from case to case
• an empirical question that necessitates a focus on specific country, firm and
sector characteristics
• host government policies can make a big difference
• What constitutes costs and benefits vary depending on the values of the observer
• differences in the relative importance ascribed to economic, political and
cultural criteria
•  
• What about effects of FDI for home countries?

The state-TNC relationship

• More generally, a couple of questions...
• to what extent have states lost power to TNCs in the world political economy
and in world politics more generally?
• are we increasingly living in a world ruled by large TNCs and a transnational
capitalist class?
• Different focus
• states and firms are mutually needy of and dependent on each other
• Textbook
• changing attitudes of governments to TNCs (neg -> pos)
• impact of capital mobility on government decision-making and national
autonomy
• impact of the globalisation of production on the nature of the state
• impact of a changing state-TNC relationship on labour/workers

Regulation of TNCs (1)

• There is no comprehensive multilateral agreement on investments to parallel the
GATT/WTO in the trade realm
• there is no consensus on what should be regulated in a prospective multilateral
agreement on investments (TNCs, host countries, and/or home countries)
• Multilateral attempts to restrict the activities of TNCs in the 1970s
• the UN Code of Conduct on Transnational Corporations (1974-92)
• the ILO’s Tripartide Decleration of Principles Concerning Multinational
Enterprises and Social Policy (1977)
• the OECD’s Guidelines for Multinational Enterprises (1976, 2000, 2010)
• Multilateral attempts to restrict what host governments can do in the 1990s
• OECD negotiations on a Multilateral Agreement on Investment (MAI)
• key elements: transparency, national treatment, most-favoured-nation
treatment, free transfer of funds, prohibition on performance requirements,
expropriation rules, dispute settlement procedures
• negotiations began in 1995 and were suspended in 1998

Regulation of TNCs (2)

• Bilateral investment treaties (BITs)
• large increase in such treaties since the 1970s
• dominant source of FDI-rules as of today
• primarily limit what host governments can do vis-a-vis TNCs
• Regional investment rules/agreements
• e.g. the EU and NAFTA; cf. transregional partnerships
• primary concern to protect FDIs and TNCs
• Multilateral investment rules/agreements (WTO)
• TRIMS (1995)
• post-Singapore efforts to further develop ‘a multilateral framework to secure
transparent, stable and predictable conditions for long-term cross-border
investment, particularly [FDI], that will contribute to the expansion of trade’
(WTO) [collapsed]
• What about
• corporate self-regulation?
• co-regulation by TNCs and civil society actors?
• indirect consumer regulation (cf. consumer choices/power)?