Multinational_Corporations_and_Nations

INGS1001 Major Essay: Question Six: MNCs MNCs are huge economic actors. The top performing MNCs. Wal-Mart ranks above Norway in terms of gross revenue vs. GDP (US$418.592b vs. US$413.5b)1,2, and ExxonMobil and Royal Dutch Shell rank above Austria (US$370.123b and US$368.056b vs. $366.3b respectively)3,4,5. However, are ‘multinational’ corporations “products of their home countries”' Toyota and Honda have international sales figures in excess of 70%6,7, and Carrefour in excess of 60%8, is this enough to say they are not products of their parent states' Although it is simple to look at statistics and make statements based on net sales by location, the first section of this essay seeks to look beyond sales figures and refine criteria to judge the extent to which MNCs can qualitatively be termed products of their parent states. The second section will look to address the capacity of MNCs to rival nation states. With such numbers they wield an undeniably large amount of power, but a qualitative analysis of power vis-à-vis nations must rely on more than quantitative comparison. Utilising Doris Fuchs’ “Three dimensions of power” theory9, this essay will analyse the instances wherein MNCs have acquired these aspects of power and hence have grown to significantly rival nation states. ------------------------------------------------- Although a MNC must obviously begin somewhere, and hence finds its roots within its home country, this is far from enough reasoning to call a MNC the “product of its home country”. For the purposes of 1: Securities and Exchange Commission (2011), Form-10K, Wal-Mart Stores Inc., US Securities and Exchange Commission Archives, Retrieved on 21/4/11 from http://www.sec.gov/Archives/edgar/data/104169/000119312511083157/dex13.htm 2: Central Intelligence Agency (2010), The World Factbook: Norway, Directorate of Intelligence, Retrieved 22/4/11 from https://www.cia.gov/library/publications/the-world-factbook/geos/no.html 3: “2010 Annual Summary Report”, Exxon Mobil Corporation Annual Reports, ExxonMobil Corporation, 25/6/10, Retrieved 22/4/11 from http://www.exxonmobil.com/Corporate/Files/news_pubs_sar_2010.pdf 4: Royal Dutch Shell Corporation, 2010 Royal Dutch Shell PLC Annual Report, Royal Dutch Shell PLC Annual Reports, 13/12/10, Online, http://www-static.shell.com/static/investor/downloads/financial_information/reports/2010/shell_2010_annual_report_20f_03.pdf 5: Central Intelligence Agency (2010), The World Factbook: Austria, Directorate of Intelligence, Retrieved 22/4/11 from https://www.cia.gov/library/publications/the-world-factbook/geos/au.html 6: Toyota Motor Corporation (2011), 2011 Financial Highlights, Toyota Motor Corporation, retrieved 17/4/11, Online, http://www.toyota-global.com/investors/financial_data/high-light.html 7: Honda Motor Corporation (2010), Consolidated Financial Results for the Fiscal Fourth Quarter and the Fiscal Year Ended 31st March 2010, Honda Motor Corporation Financial Reports, Retrieved on 22/4/11 from http://world.honda.com/investors/financialresult/2009/2009_4th/Financial_Result_2009_4q_E.pdf 8: Carrefour Group, 2009 Financial Report, Carrefour Annual Financial Reports, 31/12/09, Retrieved 22/4/11 from http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/Assemblee_generale/RFI_VGB_BAT_def_ve.pdf 9: Fuchs, D. (2007), Business Power in Global Governance, chapter 3, pp.43-70 (“Business as an Actor in Global Governance”) this essay the term “product of its home country” shall be defined as being a MNC that is economically productive in regard to the nation state from which it originates, or basically that its loyalties lie first and foremost with the economic wellbeing the parent nation. Despite being hugely successful enterprises, MNCs are capable of avoiding contributing to economic activity in their home countries and are even able to become an economic detriment. One such process by which this is commonly achieved is through avoidance of corporate income taxes. For instance, consider General Electric, the world’s seventeenth largest corporation in terms of gross revenue with US$151.211b as of 201010. However, despite its profits as a US corporation, GE performs ‘active financing’, employing tax breaks which except certain incomes and allowing GE to avoid US taxes on profits from financing production in another nation11. GE effectively controls its own tax rates, falling far short of the US’ 35% corporate tax. Reports have found that GE has managed to avoid US taxation completely through active financing and tax credits. Some reports state that GE actually profited from tax benefits, resulting in profits being increased by the taxation process, with 23% of its 2010 income (US$3.2b compared to US$14.2b) increased by these means12. ------------------------------------------------- Several other MNCs use offshore subsidiaries (through lending like GE, or through holding accounts in tax haven nations) to evade home country taxes, including Chevron (5% in 2010), Boeing (0%) and ExxonMobil (2%). With the rapid accumulation of $7.7 trillion to the US national debt and $3 trillion unpaid due to unaccounted taxes, it is obvious from the magnitude of US MNCs’ tax avoidance that their interests are far from the economic wellbeing of their parent state. This diminishment of government revenue and undermining of tax systems represents a clear shirking of duties to be expected of any corporation that is truly a “product of its home country”. 10: General Electric Company (2010), GE Annual Report Financial Section, GE Annual Reports, 31/12/10, Retrieved 15/4/11 from http://files.gecompany.com/gecom/annual10/pdf/GE_AR10_Financials.pdf 11: Kocieniewski, D. (2011), G.E.’s Strategies Let It Avoid Taxes Altogether, New York Times, Retrieved 17/4/11 from http://www.nytimes.com/2011/03/25/business/economy/25tax.html'pagewanted=1&_r=4&ref=business&adxnnlx=1301083211-EEUoh1jsujDqXficEZ9zUg 12: Securities and Exchange Commission (2011), Form 10-K, General Electric Company, Securities and Exchange Commission Archives, Retrieved 20/4/11 from http://www.sec.gov/Archives/edgar/data/40545/000119312511047479/d10k.htm Another process whereby MNCs may damage their parent states is in respect to national industry. “Hollowing out” is process by which a MNC uses a global supply chain to production proccesses, weakening the base of that industry in the parent state. An example of this is Japan’s machinery industry, historically a huge component of the nation’s economy, providing 75% of total exports13. The main actors within this industry are zaibatsu, vertically monopolistic MNCs. The local component firms of these corporations, keiretsu, are disempowered when global sourcing is viable for zaibatsu, as was the case in the 1990s and early 21st century, when Nissan’s turn to global sourcing made reducing profits the only option available to its keiretsu affiliates, lest they lose out to foreign production in East Asia. This surge in global sourcing saw their small keiretsu firms’ Gross Profit Margins drop by 60% and Capital Returns by 45% in this period compared to the mid-1980s14. ------------------------------------------------- Additionally, hollowing out can affect core industrial structures such as employment, as is the case with the US engineering industry. US Engineering and technology under MNCs such as Hewlett-Packard, IBM and Intel has seen labour move offshore to low-cost nations, namely India. Indeed, these are not merely manufacturing jobs but R&D jobs too, causing a boom in Indian engineering that is projected to reach a potential of US$40b of the projected total of US$150b-$225b in global offshore engineering spending by 202015. Conversely, the native US industry of these MNCs is declining, as indicated by a steady fall in engineering employment (electrical and computer software) from 2003 onwards16. Not only is there the immediate effect of job and wage loss to other nations, but the lowered stability of these professions decreases the desirability of careers in the industry and therefore lowers education and training in such areas. This continuing erosion of employment and R&D jobs combined with the boosting of foreign nations’ expertise and productivity in these same 13: Whitaker, D.H. (1997), Small Firms in the Japanese Economy, Cambridge and New York: Cambridge University Press, Cambridge 14: Cowling, K. and Tomlinson P. R. (2001), The Problem of Regional “Hollowing Out” in Japan: Lessons for Regional Industrial Policy, Warwick Economic Research Papers, Paper No. 625 pp.13-15 15: Corporate Catalyst India (2006), A Report on Indian Engineering Industry, Corporate Catalyst India Surveys, Retrieved 27/4/11 from http://www.cci.in/pdf/surveys_reports/indias_engineering_sector.pdf 16: Bureau of Labor Statistics (2009), Occupational Employment and Wages (Electrical Engineers) May 2009, Bureau of Labor Statistics, Retrieved 27/4/11 from http://www.bls.gov/oes/current/oes172071.htm areas doubly decreases US superiority in the global engineering industry. Hollowing out of US engineering and Japanese manufacturing industries are merely two examples of ‘elite globalisation’, a practice which is increasingly common by MNCs the world over. The practice itself is indicative of corporate profitability overriding priority to the economy of the parent state, and is another illustration of the way in which MNCs do not act as products of their home countries, and can even act in ways that are outright harmful to their native economies. In assessing how MNCs are capable of rivaling nation states in terms of power, a measurement scheme is critical. In this essay’s analysis, the theory of “Three Dimensions” of power shall be used, as outlined by Doris Fuchs in her book Business Power in Global Governance. ------------------------------------------------- Firstly instrumental power must be addressed: the capability of an MNC to achieve outcomes and decisions best suited to its needs and desires. The most obvious method by which MNCs attain this is by lobbying legislators. To see this power in action one can refer back to the aforementioned example of US MNC tax avoidance. President Clinton’s inadvertent creation of a loophole in a 1996 tax amendment allowed MNCs to legally use foreign tax havens17. As previously discussed, enabling tax avoidance allows MNCs to increase profits, thus the loophole was in the interest of the corporations while opposing state interests. Efforts to amend the loophole by the Treasury in 1998 were met with opposition from a number of lobbyists wielding substantial economic clout when ExxonMobil, Microsoft and other US MNCs successfully lobbied the majority of congressional tax-writers to oppose the Treasury, and later lobbied Senate Finance Committee Chairman Roth to amend an IRS bill that effectively delayed any Treasury action for six months. The result was that the loophole was made a 17: Wayne L. (1998), Multinationals move fast to preserve tax loophole, Treasury backs down in face of lobbying onslaught by big businesses, Austin American Statesman, 12/7/1988, pp. 11 permanent18. Similar results have been achieved in response to repeated efforts to amend tax breaks in 200419, 200820 and 2010; with GE coming to the fore, most recently spending US$4.18m lobbying to extend tax breaks until at least 2012, with an estimated US$9.16b to be saved by GE over the two years, and US$43b by US MNCs as a whole21. Such instances of MNCs conclusively changing attempted outcomes by the state (particularly a state as influential as the USA) in matters as paramount to state interests as taxation is a sign of the acquisition by MNCs of the first face of power. The second face of power, structural power, is in this case the ability for a MNC to make it so that outcomes pursued by nation states that are detrimental to the corporation are unviable. Structural power is reflected in the underlying causes of what has been mentioned in thus far; hollowing out occurs due to the structural power in MNCs’ labour mobility, as the option for local firms to retain profits undesirable to parent MNCs is eliminated due to a MNC’s ability to merely shift production to a low-cost foreign affiliate22. Structural power also lies in the capital mobility of a globalised world, under control of an “electronic herd” which holds the ability to place or remove investments instantly23, an ability that threatens governments when legislating policies; if a bill is passed that is detrimental to a MNC, billions in invested dollars can be pulled from the nation’s economy. It is this capability that contributes to the “golden straitjacket” theory that nations have no choice but to conform to deregulation, low taxes and trade liberalisation to avoid losing FDI23. A recent instance of MNC structural power is in the 2010 downfall of the Rudd Government in Australia with regards to the ------------------------------------------------- Resource Super Profits Tax (RSPT). The RSPT levied a 40% tax on all mining industry in Australia with 18: Ibid. 19: Donmoyer, R.J and Layne, R. (2004), TAXES ; Giving businesses a break ; Several multinational companies are currently lobbying U.S. lawmakers to exempt taxes on revenue earned overseas, San Antonio Express, 31/7/04, pp.7 20: Rubin R. and Donmoyer R. J (2011), GE’s Tax-Break Guard Dogs, Bloomberg Businessweek, Retrieved 23/4/11 from http://www.businessweek.com/magazine/content/11_10/b4218027853982.htm 21: Cowling, K. and Tomlinson P. R., The Problem of Hollowing Out, pp. 13 22: Friedman, T. (1999), The Lexus and the Olive Tree: Understanding Globalization, Anchor, New York, Chapter 6: The Golden Straitjacket pp.87-92 23: Ibid. risk levels over 5.7%, and thus was met with opposition by mining MNCs including Rio Tinto and BHP Billiton. Rio Tinto perceived “damage to Australia’s global investment reputation”24 and BHP Billiton deemed the tax “the biggest threat to the mining industry [in the past 17 years]”25.The vested interest of these MNCs proved to be a major factor in the ousting of Prime Minster Rudd and the following disposal of the proposed RSPT. This example highlights the reach of MNC structural power, such that it can make a proposed tax such as the RSPT unviable to the extent that the premiership of a developed country can be deposed as a result. ------------------------------------------------- Finally, discursive power must be addressed: the capability of MNCs to influence the desires and thoughts of nation states. One way through which discursive power can be attained and put to use is by media campaigning. It has been suggested that the failure of the 1993 Clinton Health Plan was due to advertising against it performed by the Business Roundtable26, a group of US MNC CEOs. Other recent efforts to acquire discursive power include the Global Climate Coalition, comprising of MNCs such as BP, Exxon and Shell. Coalition media campaigns portrayed global warming as scientifically inaccurate and detrimental to enterprise. The influence of this group can be linked to the US decision to not ratify the Kyoto Protocol for fear of the effects it could have on these MNCs’ productivity27. Crucially, as Fuchs argues, the basis of discursive power is the perception of actors as politically legitimate28, and so it is to this aspect that this analysis must lastly turn to. MNCs’ political legitimacy is best found in the discourse of recent economists and international organisations. The agendas of these actors have led to the Washington Consensus, a set of “standard” measures by which nations 24: Chambers, M (2010), Super tax has damaged Australia's global investment reputation: Rio Tinto, Wall Street Journal, Retrieved 23/4/11 from http://www.theaustralian.com.au/business/mining-energy/super-tax-has-damaged-australias-global-investment-reputation-rio-tinto/story-e6frg9df-1225870503254 25: Hewett J. (2010), Tax biggest danger to mining: BHP Billiton CEO Marius Kloppers, Wall Street Journal, Retrieved 23/4/11 from http://www.theaustralian.com.au/business/tax-biggest-danger-to-mining-marius-kloppers/story-e6frg8zx-1225876203592 26: Scott Bowman (1996), The Modern Corporation and American Political Thought: Law, Power, and Ideology, Pennsylvania State University Press, University Park 27: Doris Fuchs (2005), Commanding Heights' The Strength and Fragility of Business in Global Politics, Millennium – Journal of International Studies, Vol. 33 No. 3pp.790, SAGE Publications, London 28: Fuchs, Commanding Heights, pp.790-793 seeking to be prosperous should conform29. These measures can be linked back to the corporate wills that may be imposed by way of MNCs’ structural power. The measures include privatisation; market liberalisation and deregulation; measures taking control away from governments and towards corporations. The adoption of such measures by dominant and influential IOs under the Bretton Woods System (IMF, World Bank, WTO) and their subsequent implementation in national reforms indicates how legitimate corporations have become as a part of political processes. Corporations are perceived “experts” in national economic activity and keys to successful economic reform. This perception of optimality being achieved through giving more freedom and regulation to private bodies in the market is the indicator for the acquisition by MNCs of discursive power. Summarily it can be seen that MNCs cannot be definitively termed products of parent states in a qualitative judgement; as this essay has shown instances in which wealthy MNCs have made concerted and manipulative efforts to avoid contributing due revenue back to their home governments. Furthermore, the harmful hollowing out which home countries can undergo due to the profit-seeking MNCs can even make home countries appear victims to the actions and restraints of their MNCs. Insofar as capacity to rival nation states is concerned, in accordance to a three-dimensional analysis of MNC power it is clear that a MNC is capable of acquiring all three ‘faces’ of power to the effect that it can outcomes, restrictions and interests can reign superior in all three aspects against nations states. ------------------------------------------------- 29: Held, D. (2005), Globalization; The Dangers and the Answers, Open Democracy, Retrieved 26/5/11 from http:/www.opendemocracy.net/globalization-vision_reflections/article_1918.jsp Bibliography * Securities and Exchange Commission (2011), Form-10K, Wal-Mart Stores Inc., US Securities and Exchange Commission Archives, Retrieved on 21/4/11 from http://www.sec.gov/Archives/edgar/data/104169/000119312511083157/dex13.htm * Central Intelligence Agency (2010), The World Factbook: Norway, Directorate of Intelligence, Retrieved 22/4/11 from https://www.cia.gov/library/publications/the-world-factbook/geos/no.html * Central Intelligence Agency (2010), The World Factbook: Austria, Directorate of Intelligence, Retrieved 22/4/11 from https://www.cia.gov/library/publications/the-world-factbook/geos/au.html * “2010 Annual Summary Report”, Exxon Mobil Corporation Annual Reports, ExxonMobil Corporation, 25/6/10, Online, http://www.exxonmobil.com/Corporate/Files/news_pubs_sar_2010.pdf * Royal Dutch Shell Corporation, 2010 Royal Dutch Shell PLC Annual Report, Royal Dutch Shell PLC Annual Reports, 13/12/10, Online, http://www-static.shell.com/static/investor/downloads/financial_information/reports/2010/shell_2010_annual_report_20f_03.pdf * Toyota Motor Corporation, 2011 Financial Highlights, Toyota Motor Corporation, retrieved 17/4/11, Online, http://www.toyota-global.com/investors/financial_data/high-light.html * Honda Motor Corporation (2010), Consolidated Financial Results for the Fiscal Fourth Quarter and the Fiscal Year Ended 31st March 2010, Honda Motor Corporation Financial Reports, Retrieved on 22/4/11 from http://world.honda.com/investors/financialresult/2009/2009_4th/Financial_Result_2009_4q_E.pdf * Carrefour Group, 2009 Financial Report, Carrefour Annual Financial Reports, 31/12/09, Online, http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/Assemblee_generale/RFI_VGB_BAT_def_ve.pdf * Doris Fuchs (2007), Business Power in Global Governance, chapter 3, pp.43-70 (“Business as an Actor in Global Governance”) * General Electric Company (2010), GE Annual Report Financial Section, GE Annual Reports, 31/12/10, Online, http://files.gecompany.com/gecom/annual10/pdf/GE_AR10_Financials.pdf * Kocieniewski D. (2011), G.E.’s Strategies Let It Avoid Taxes Altogether, New York Times, Retrieved 17/4/11 from http://www.nytimes.com/2011/03/25/business/economy/25tax.html'pagewanted=1&_r=4&ref=business&adxnnlx=1301083211-EEUoh1jsujDqXficEZ9zUg * Securities and Exchange Commission (2011), Form 10-K, General Electric Company, Securities and Exchange Commission Archives, Retrieved 20/4/11 from http://www.sec.gov/Archives/edgar/data/40545/000119312511047479/d10k.htm * Whitaker, D.H. (1997), Small Firms in the Japanese Economy, Cambridge and New York: Cambridge University Press, Cambridge * Cowling, K. and Tomlinson P. R. (2001), The Problem of Regional “Hollowing Out” in Japan: Lessons for Regional Industrial Policy, Warwick Economic Research Papers, Paper No. 625 * Corporate Catalyst India (2006), A Report on Indian Engineering Industry, Corporate Catalyst India Surveys, Retrieved 27/4/11 from http://www.cci.in/pdf/surveys_reports/indias_engineering_sector.pdf * Bureau of Labor Statistics (2009), Occupational Employment and Wages (Electrical Engineers) May 2009, Bureau of Labor Statistics, Retrieved 27/4/11 from http://www.bls.gov/oes/current/oes172071.htm * Chambers, M (2010), Super tax has damaged Australia's global investment reputation: Rio Tinto, Wall Street Journal, Retrieved 23/4/11 from http://www.theaustralian.com.au/business/mining-energy/super-tax-has-damaged-australias-global-investment-reputation-rio-tinto/story-e6frg9df-1225870503254 * Hewett J. (2010), Tax biggest danger to mining: BHP Billiton CEO Marius Kloppers, Wall Street Journal, Retrieved 23/4/11 from http://www.theaustralian.com.au/business/tax-biggest-danger-to-mining-marius-kloppers/story-e6frg8zx-1225876203592 * Scott Bowman (1996), The Modern Corporation and American Political Thought: Law, * Power, and Ideology, Pennsylvania State University Press, University Park * Doris Fuchs (2005), Commanding Heights' The Strength and Fragility of Business in Global Politics, Millennium – Journal of International Studies, Vol. 33 No. 3 pp.771-802, SAGE Publications, London