POSO007S7

INTERNATIONAL POLITICAL ECONOMY

Dr Ali Burak Güven: a.guven@bbk.ac.uk

MULTINATIONAL CORPORATIONS &

FOREIGN DIRECT INVESTMENT (FDI)
 Thus far...
Commodities: GVCs and the Coffee Industry
• Global value chains (GVCs); can countries trdae their way out of poverty &
underdevelopment?
• Coffee: historical significance; the coffee paradox; North-South disparities
• Implications for various actors of regulation (ICA) vs liberalisation: producers,
roasters/MNCs, consumers

World Trade: From GATT to the WTO

• Comparative advantage + tariffs/quotas/subsidies; capitalism/imperialism/”free

trade”; rising protectionism from late 19th cc onwards
• GATT (1947): Non-discrimination (MFN + National Treatment); reciprocity;
transparency; problem of non-tariff barriers (NTBs)
• Uruguay Round --- WTO (1994): TRIMS/TRIPS/GATS; dispute settlement;
organisational body; peak of hyperglobalism
• Critics of WTO; Doha Stalemate (developing + emerging countries)

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“The central questions for any firm involved in global production involves
how to govern the value chain and where to locate different activities.”
(Thun, in Ravenhill)

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Source: FT – 04.02.2020 - https://www.ft.com/content/de2a1e52-4677-11ea-aee2-9ddbdc86190d

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 Lecture Outline

1. MNCs and FDI: Concepts, Context

2. The Growth of Transnational Production

3. Key Issues and Processes

4. Policy Challenges

5. Conclusion

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 1. MNCs AND FDI: CONCEPTS, CONTEXT

• Fieldhouse: A multinational corporation is “a business enterprise which ‘owns and

controls income-generating assets in more than one country.’” Concept inspired
by US corporate expansion in the 1950s and 1960s---good intellectual history of
the term pointing out controversy from early on, but importantly the two distinct
approaches to it: management (theory of firm) + international economics / IPE.
• “Multinational” or “transnational” corporations? Few such firms are truly
“multinational”---many have a single national base. O’Brien & Williams: TNC as
the more appropriate term: “a firm that owns and controls production (value-
added) facilities in two or more countries.”
• Becoming a TNC/MNC entails foreign direct investment (FDI): foreign investor
appropriates control over productive resources and corporate decisionmaking, as
opposed to portfolio investment limited to transfer of specific assets (usually
capital only) without control over business decisions.
• All FDI involves business expansion and integration:
Horizontal integration = Expanding to firms/activities in similar products
Vertical integration = Expanding towards the supply chain

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• While TNCs are not new (e.g. Dutch + British East India Companies), the immense
growth of FDI/MNCs is a post-WW2 phenomenon, accelerated during the age of
“globalisation” : transnationalisation has translated into corporate
wealth/power .

• UNCTAD World Investment Report 2020: Global FDI $1.54 trillion in 2019, $1.495
trillion in 2018. Preliminary estimate (2021) – global FDI declined by 42% in 2020, to
$859 billion.
• FDI top host economies 2018-19 (in order): US, China, Singapore, Netherlands,
Ireland, Brazil, Hong Kong, UK, India, Canada, Germany, Australia, France, Mexico,
Russia, Italy, Cyprus, Indonesia, Sweden, Israel.
• FDI top outflow economies (in order): Japan, US, Netherlands, China, Germany,
Canada, Hong Kong, France, Korea, Singapore, UK, Italy, Spain, Sweden, Russia,
Belgium, Ireland, Denmark, UAE, Brazil.
• Very important note: FDI measures neglect the “outsourcing” of production.

• Main trends: (i) Still mostly developed to developing, but less than before, and yet
a lot of within-region FDI; (ii) Mergers & acquisitions (M & A) very important, yet
declining in recent years; (iii) Decline in “greenfield” investment.
• Note these trends come after three decades of steady increase in FDI...
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 Region [2017-2019] FDI Inflows FDI Outflows
Developed Economies $2,511 b $2,546 b
Europe $1,363 b $1,433 b
North America $898 b $540 b
Developing Economies $2,085 b $1,255 b
Africa $138 b $25 b
Asia $1,475 b $1,152 b
LAC $469 b $80 b
Transition Economies $140 b $100 b

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 From the 2021 report:
https://unctad.org/webflyer/world-investment-report-2021

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 Largest TNCs (UNCTAD-2019)
Web table 19. The world's top 100 non-financial MNEs, ranked by foreign assets, 2019 a
(Millions of dollars and number of employees)
Ranking by: Assets Sales Employment
TNI b
Foreign Foreign
assets
TNI b Corporation Home economy Industry c Foreign Total Foreign Total d
Total (Per
cent)

1 19 Royal Dutch Shell plc United Kingdom Mining, quarrying and petroleum 376 417 402 681 276 518 331 684 59 000 83 000 82.6

2 46 Toyota Motor Corporation Japan Motor Vehicles 307 538 485 422 187 768 275 390 227 787 359 542 65.0

3 22 BP plc United Kingdom Petroleum Refining and Related Industries 259 860 295 194 215 203 278 397 58 900 72 500 82.2

4 41 Softbank Group Corp Japan Telecommunications 253 163 343 306 29 286 56 910 55 272 74 953 66.3

5 27 Total SA France Petroleum Refining and Related Industries 249 678 273 865 137 438 175 985 71 456 107 776 78.5

6 54 Volkswagen Group Germany Motor Vehicles 243 469 548 271 227 940 282 776 374 000 671 000 60.3

7 17 Anheuser-Busch InBev NV Belgium Food & beverages 192 138 237 142 44 352 52 251 148 111 171 915 84.0

8 29 British American Tobacco PLC United Kingdom Tobacco 184 959 186 194 25 232 32 998 31 196 53 185 78.2

9 56 Daimler AG Germany Motor Vehicles 179 506 339 742 163 875 193 357 124 842 298 655 59.8

10 60 Chevron Corporation United States Petroleum Refining and Related Industries 172 830 237 428 75 591 140 156 22 800 48 200 58.0

11 78 Exxon Mobil Corporation United States Petroleum Refining and Related Industries 169 719 362 597 123 801 255 583 35 058 74 900 47.4

12 13 Vodafone Group Plc United Kingdom Telecommunications 168 394 184 253 42 530 49 971 58 429 68 724 87.2

13 88 EDF SA France Electricity, gas and water 155 021 340 692 30 625 79 827 34 381 165 790 34.9

Hong Kong,
14 11 143 367 155 523 32 556 38 163 279 000 300 000 90.2
CK Hutchison Holdings Limited China Retail Trade
15 33 Honda Motor Co Ltd Japan Motor Vehicles 143 180 188 541 116 150 137 382 153 215 219 722 76.7

16 71 Enel SpA Italy Electricity, gas and water 135 691 192 570 28 311 86 597 38 503 68 253 53.2

17 32 Siemens AG Germany Industrial and Commercial Machinery 134 634 163 598 77 280 97 957 269 000 385 000 77.0

China National Petroleum Corp

18 96 133 636 595 935 171 756 410 023 122 704 1 266 400 e
24.7
(CNPC) China Mining, quarrying and petroleum
19 49 Deutsche Telekom AG Germany Telecommunications 132 443 191 723 62 605 90 140 116 422 210 533 64.6

20 63 BMW AG Germany Motor Vehicles 126 609 256 160 101 614 116 644 43 360 133 778 56.3

21 80 Microsoft Corporation United States Computer and Data Processing 117 460 286 556 61 644 125 843 59 000 144 000 43.6

22 45 Johnson & Johnson United States Pharmaceuticals 116 200 157 728 39 152 82 059 97 393 132 200 65.0

23 81 Apple Computer Inc United States Computer Equipment 114 719 338 516 157 908 260 174 47 928 137 000 43.2

Takeda Pharmaceutical
24 9 113 414 118 140 24 828 30 283 45 595 47 495 91.3
Company Japan Pharmaceuticals
25 64 General Electric Co United States Industrial and Commercial Machinery 112 676 266 048 55 850 95 215 135 000 205 000 55.6

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 Fortune Global 500 (2020)
Note the difference between the world’s largest corporations
& the world’s largest TNCs/MNCs/MNEs
Fortune Global 500 list of 2020

Rank Company Country Industry Revenue in USD

1 Walmart United States Retail $524 billion
2 Sinopec Group China Petroleum $407 billion
3 State Grid China Energy $384 billion

4 China National Petroleum China Petroleum $379 billion

5 Royal Dutch Shell Netherlands Petroleum $352 billion

6 Saudi Aramco Saudi Arabia Energy $330 billion

7 Volkswagen Germany Automobiles $283 billion
8 BP United Kingdom Petroleum $283 billion
Internet Services
9 Amazon.com United States $281 billion
and Retailing
10 Toyota Motor Japan Automobiles $275 billion

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There was a time when it was popular to compare country GDPs and TNC
revenues...

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 2. THE GROWTH OF TRANSNATIONAL PRODUCTION
• What accounts for the rise of transnational production in recent decades and how are we to
analyse it? Three interrelated dimensions:

1. Market / firm incentives: In “perfectly competitive markets” there is little incentive to invest
elsewhere; you’d rather trade! However, the idea of “firm” itself is based on minimising
“transaction costs” (Coates-1937). By extending operations abroad via subsidiaries, a parent
company can reduce costs: keep flow of capital/ technology/market access within the company;
secure the production flow; eliminate need for licensing out; increase efficiency /
competitiveness overall.

2. Technological and structural/market changes facilitate transnationalisation :

Technology: Lower cost of transport (containerisation) and communications; shifts in the
production process (towards post-Fordism). (How will robotisation impact?)
Structural: The re-emergence of global finance in the 1970s: Firms can finance/ invest abroad
more easily; insurance/capital markets/international law more conducive; self-reinforcing
process: competition dictates internationalisation.

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3. Political/policy shifts: Perhaps most important, certainly for our purposes. Trade
liberalisation and growth of international trade (last week) have enabled
transnational production networks. Note also distinct shifts in strategic thinking:
a. State geopolitical strategy: US supports FDI outflows to expand the capitalist
system during Cold War. Later, American TNCs crucial for US global power (Apple,
Google). Same principle applies to all major economies. Fusion of state-corporate
interests; also, multinational corporate behaviour reflects national structures [see
classic article by Pauly and Reich, 1997, International Organization 51 (1) ]
b. FDI inflows seen necessary and positive by (especially developing) countries:
Transition from import-substitution industrialisation / infant industry production
to export-led growth / global integration requires openness to FDI. FDI is also
good to finance current account deficits. Hence, special incentives by many
countries to attract FDI, most notably export processing zones (EPZs). Mexico core
example.

• Trade liberalisation -WTO/ rise of TNCs / financial liberalisation all part of the
same complex process of neoliberal globalisation, i.e. ever tighter integration of
liberalised national markets. Note though that many think national characteristics
/ interests / problems hardly disappear.
• Check out UNCTAD 2020, p. 149, “Evolution of Policy Environment”!
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UNCTAD 2021 Report, p110

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 3. KEY ISSUES AND PROCESSES
• Shifts in production processes: From Fordist to post-Fordist production.
Fordism: mass production/mass consumption/standardised products/high stocks.
Post-Fordism: economies of scope/production in batches/flexible specialisation (Piore &
Sabel – 1986 – The Second Industrial Divide).

Ford vs Toyota (just-in-time production). Notice the political implications: Fordism

implies armies of well-paid, often organised blue-collar workers. Post-Fordism is flexible;
production distributed across smaller plants in various jurisdictions. Yet also note sectoral
differences and co-existence of both systems. Today: AI.

• Global value chains: A step up from the above observation. How do firms organise
activities across different countries and stages of production? Thun in Ravenhill:
Governance – how to coordinate activity? Chains of suppliers: modular, relational, captive
value chains. Technology allows fragmentation of the value chain...
Location – National markets / laws. Barriers to entry / labour force / taxation. Why locate
production in one part of the world and not another? Comes with significant coordination
challenges...

Direct investment (fragmentation of production) vs outsourcing (check case of “triangular

manufacturing” re: GAP/TW in Thun p. 189).

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Note the current dynamics in FDI flows:

• Mergers and acquisitions (M & A): Increasing trend driving FDI that parallels the
decline of “greenfield investment” (= establish new production facility from
ground up). Rather, a rise in M&A + joint ventures + alliances. In 2014 cross-
border M&A = $900 billion. (The opposite is “divestment” = sell off foreign assets
for downsizing.) In the past, mostly developed TNCs were interested in developing
country assets. Currently the trend has been reversed, with growing interest in
developed country firms/brands from developing country TNCs.

• Sectoral dynamics: FDI used to be mainly associated with manufacturing +

commodities (oil, mining). From 2000s onwards, service sector (finance,
telecommunications) took over (over 60% in 2012).

• Financialisation: Private equity firms, sovereign wealth funds very active players in
the M&A market. Long-term production concerns are losing ground.

• Despite crisis + continued vulnerabilities + growing concerns re: global economy,

FDI and transnational production grew significantly in 2010s: People employed by
TNCs rose from ~50 million in 2007 to ~75 million in 2014, while total assets
doubled (to nearly $100 trillion) . Yet decline in recent years. Perfect storm??

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 4. POLICY CHALLENGES
• The growth of FDI and transnational production poses two main policy challenges:

1. Is FDI / TNCs good or bad? Thus, should countries restrict or foster them?
O’Brien & Williams offer useful list:
FOR:
• Transfer of technology, capital, market access
• Wealth effect: Additional tax revenues + jobs + increased GDP + current account
balance + tighter integration with “the global marketplace”
• Indirectly, fosters entrepreneurship, new management culttures, more efficient
resource allocation, economic/political/cultural exposure
AGAINST
• Transfer of wrong assets; TNCs might disrupt domestic markets and integration
• Wealth effect could be negative: Tax evasion + low-paid jobs + potential limits on
exports given company interests > national interests ( also Chang on GM vs US!)
• Indirectly, alien business cultures, possible limits of domestic industrial upgrading,
social unrest, possible political interference

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2. State / TNC relations

Obviously, whether FDI is advantageous or not depends on the country + the firm.

• Competition state: States aim at increasing the international competitiveness of

their homegrown TNCs. They lobby on their behalf, but also try to shape global
and national economic rules to benefit home TNCs, foster their activities via
supporting R&D, government contracts, special measures etc.
• Race to the bottom: Countries compete each other to attract FDI by lowering
taxes + loosening regulations (labour, environment). This causes a race to the
bottom. Many, however, questioned this idea: Race to the middle?
• How, then, to regulate activities of TNCs? Are not they too powerful for individual
countries to regulate? Many think they are. How about small countries acting as
tax havens for large MNCs? Thus, international efforts at TNC regulation:
--- UN Global Compact
--- OECD Anti-Bribery Convention
--- Various OECD tax initiatives: “Base Erosion and Profit Shifting”; guidelines on
regulating “transfer pricing” as a means of profit allocation.
--- Also check Amazon UK tax links in additional resources...

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• China as a special case? The world’s factory: Interests of Northern governments vs
Northern TNCs often collide on what China offers. In China, meanwhile, the
significance of regional networks and clusters.
• Yet labour costs and therefore production costs have been steadily rising. Chinese
par capita income is now higher than Argentina, Mexico, Turkey, Brazil. How to
stay ahead and avoid a middle income trap? Further state incentives to steer firms
towards higher-value added activities is one answer – rediscover the domestic
market. But how feasible is this in the long run?

• Core Trend: “The World Investment Report has monitored FDI and the activities of
MNEs for 30 years, during which international production saw two decades of
rapid growth followed by one of stagnation. Flows of cross-border investment in
physical productive assets stopped growing in the 2010s, the growth of trade
slowed down and GVC trade declined. The 2010s were only the quiet before the
storm. The crisis caused by the COVID-19 pandemic arrives on top of existing
challenges to the system of international production arising from the new
industrial revolution (NIR), growing economic nationalism and the sustainability
imperative. These challenges were already reaching an inflection point; the
pandemic looks set to tip the scales. The decade to 2030 is likely to prove a
decade of transformation for international production. (UNCTAD 2020, p. xii)”

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 Conclusion
• Transnational production and FDI are among the main drivers of economic
globalisation, and have maintained momentum even in difficult times.
• Key concepts: MNCs/TNCs; FDI vs portfolio investment; horizontal/vertical integ.
• Behind the growth of transnational production are: (i) incentives to reduce
transaction costs; (ii) technological/structural shifts, esp. financial markets; (iii)
changes in policy and political attitudes.
• Note the significance of: rise of post-Fordism; global value chains; mergers &
acquisitions; sectoral dynamics; financialisation.
• TNCs/FDI create major policy challenges: Is productive integration good or bad?
And how should states respond to it? Competition state. Race to the bottom?
Note recent initiatives to establish international regulations for FDI/TNCs.
• Consider especially: China as the factory of the world? More generally,
processes/consequences of developing country productive integration.
Implications for development and North-South relations remain contentious.
• in the last few years, pessimism re: TNCs: The decline of MNCs? Slowbalisation?
(The Economist---Jan 2017; July 2019). UNCTAD 2020/21 reports key!

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