Are transnational corporations more powerful than formal inter-governmental institutions?

Are transnational corporations more powerful than formal inter-governmental institutions?

Question:

Evaluate the claim that transnational corporations are more powerful than any formal inter-governmental institution.

Literature Review

In the 21st century, economic globalization and the economic development of various countries presents a serious challenge, but the modernization drive has provided new opportunities. In this essay, a transnational corporation (TNC) or multinational corporation (MNC), also called multinational enterprise (MNE), is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. With the swift growth of world’s economy, the rapid development of the transnational corporation and the increasing business activities in a global scale, any multinational companies in the implementation of transnational operations, must be designated in accordance with local cultural, political, economic management strategy. “The transnational corporation’s ability to operate across frontiers gives them special comparative advantages in relation to other actors in the economic system with which they are confronted. Such actors are, in particular: labour, consumers, international companies and national governments.” (GraziaIetto-Gillies, 2001) The nature of such advantages is specific to transnationalism: to the ability to operate across nation-states as loci of different regulatory regimes. This adds to any advantages deriving from exploiting specific location characteristics in any one of the countries in which they operate.

As countries adopt more open outward oriented approaches to economic growth and development, the role of transnational corporations or multinational enterprises becomes more important. As local markets throughout the world are being deregulated and liberalized, foreign firms are looking to locate part of the production process in other countries where there are cost advantages. These might be cheaper sources of labour, raw materials and components or have preferential government regulation. Although less-developed countries may present high levels of risk, they also present the potential for higher levels of profit. Many less-developed countries with growing economies and increasing incomes may provide future growth markets. Many development economists are concerned with role of the multinational corporations in low income countries and identify a number of problems associated with foreign direct investment. Equally other economists and politicians argue that multinational corporations’ activity can drive growth and development. The true answer is that probably both arguments are applicable and justifiable when looked at from certain countries with certain transnational corporations at certain times.

The first modern transnational corporation was the Dutch East India Company, established in 1602. Today, many large multinationals can boast budgets that exceed some national GDPs. Multinational corporations can have a powerful influence on local economies as well as the world economy and play an important role in international relations and globalization. “The public at large usually interprets a high degree of globalization and international integration to mean and imply that: we travel more, we communicate with the rest of the world more quickly, we receive images and sounds of news in real time, we can able to buy the same type of car or jeans or hamburger in Dallas, Rome, Beijing, Moscow or Mexico City, we can do business all over the world.” (Held et al., 1999) No analysis of globalization can be complete without an understanding of the role played in it by the transnational companies. They are the key to understanding global changes in the economy and society: they are therefore key players in the integration process.

A transnational corporation investing in an area may result in a significant injection into the local economy. This may provide jobs directly or through the growth of local ancillary businesses such as banks and insurance. It might initiate a multiplier process generating more income as newly employed workers spend their wages on consumption. And, transnational corporations may provide training and education for employees thus creating a higher skilled labour force. These skills may be transferred to other areas of the host country. Often management and entrepreneurial skills learned from multinational enterprises are an important source of human capital. Also, transnational corporations will contribute tax revenue to the government and other revenues if they purchase existing national assets as in the case in Zambia through the privatization process. The Internal Revenue Service must analyze the movement of goods and services between a transnational company’s domestic and foreign operations and then assess whether the transfer price that was assigned on paper to each transaction was fair. “Internal Revenue Service studies indicate that U.S. transnational corporations have an incentive to set their transfer prices so as to shift income away from the United States and its higher corporate tax rates and to shift deductible expenses into the United States”.

Multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force multinational companies to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantages or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil, which have viable indigenous market competitors. And, in addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization, forcing a company to sell its local assets to the government or to other local nationals, or changes in local business laws and regulations can limit a multinational’s power.

Though the number of transnational corporations worldwide is increasing, the largest ones are still the most relevant in terms of activities and in terms of international reach. UNCTAD (2000:71) points out how "Large companies dominate both outflows and inflows of direct investment. For instance, the 50 largest transnational corporations from the major home countries account for over half of their foreign direct investment outflows, indeed, for some countries, the share exceeds 90 per cent". Moreover, the list of the world’s 100 largest transnational corporations tends to be dominated by firms from the EU, US and Japan. In 1998 some 93 of the top 100 transnational corporations had their headquarters in Japan, North America or the EU. The percentage has steadily increased from 90 in 1990 to 92 in 1997 and 93 in 1998 (UNCTAD: 2000). The direct activities of transnational corporations have increased worldwide in absolute terms and, most pertinently, in relative terms. The relative weight of their activities, in relation to the size of the domestic economy, and its growth, in the world regions differs.

But, we still see some problems of transnational corporations. Firstly, the TNC may employ largely expatriate managers ensuring that incomes generated are maintained within a relatively small group of people. The attraction for the transnational corporations may be the large supply of cheap manual labour who they can employ at low wages. This may contribute to a widening of the income distribution. It will also not lead to the transfer of management skills. Then, transnational corporations’ investment in less-developed countries often involves the use of capital intensive production methods. Given that many less-developed countries are often endowed with potentially large low wage labour forces and have high level of unemployment, this might be considered inappropriate technology. More labour intensive production methods might be a more appropriate option for alleviating poverty and aiding development. Any resulting growth might be considered anti-developmental. Thirdly, transnational corporations engage in transfer pricing where they shift production between countries so as to benefit from lower tax arrangements in certain countries. By doing this, they can minimize their tax burden and the tax revenue of national governments. As many transnational corporations are very large and have considerable power they can exert influence on governments to gain preferential tax concessions and subsidies and grants. Outward oriented economists maintain that the cycles of poverty will not be broken from within the domestic economy. The level of investment needed to raise productivity and incomes is not possible. Thus foreign direct investment through the transnational corporation activity is essential. By investing in areas and utilizing the factors of production where the less-developed countries have an absolute and comparative advantage,transnational corporations will lead to a more efficient allocation of the worlds’ resources. However if this leads to overspecialization and overdependence in certain sectors of the economy then the host country will be vulnerable especially if the transnational corporation decides for commercial reasons to leave the country in the future.

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