Steve Kapfer and Dr. Brian Champion, Political Science and World Politics Librarian
One of the most important issues states face is the growing power of the multinational corporation. Multinational corporations (MNC) have an immense influence in the international system, participating in the majority of economic activity and growth. It is therefore important to understand the effect that multinational corporations have on international relations in order to correctly identify why particular events happen. If policy is made without an accurate understanding of the international system then chances are that it will cause more harm than good.
This short essay serves an inquiry into the nature of MNCs in an attempt to briefly explain how MNCs affect the international system, and are, in turn, affected by the international system. The aim of this essay is to point out that while states still have power de jure in the international system, as well as in their own country, MNCs have power de facto both in the international system and within individual states.
This short essay seeks to show how MNCs are eroding state power by looking at different theories on the nature of the firm – all of which seek to explain why MNCs are so efficient in allocating scarce resources in the name of maximizing profits or returns to shareholders. Profit maximization is necessary for any firm to be successful in a competitive market. Firms exist, then, because they are able to efficiently allocate scarce resources in a way that is profit maximizing. Multinational corporations, therefore, must exist because they can efficiently allocate scarce resources on a global scale. Kogut and Kulatilaka call this ability ‘operating flexibility’ . Operating flexibility adds value to a firm because it allows a firm to exercise a variety of different options due to three conditions: uncertainty, time dependence, and discretion. Multinational corporations capitalize on uncertainties, such as volatile exchange rates, take advantage of time dependence by investing in two plants in different geographical locations, and create managerial discretion by instituting beneficial managerial practices.
As Kogut and Kulatilaka asserted, one of the options that arises from operating flexibility is managerial discretion. In order to fully utilize managerial discretion firms must have some kind of know-how that allows them to operate efficiently. Know-how, though, is not produced in a market because of the inability of the market to put a price on know-how, along with the problem of free-riding. Firms, then, produce and internalize know-how that is not easily transferred to or replicated by other firms in order to gain a competitive edge over other competing firms. By creating new knowledge, and coding it in a way that is easily replicated within the firm, firms are able to expand their market.
Clearly, multinational corporations gain much of their power from their ability to efficiently operate, coordinate, and manage transactions between states. In the name of efficiency MNCs can and will shift production from states with high costs to states with low costs. States, then, should be concerned with the power that MNCs have because of their ability to determine employment and, ultimately, the prosperity of the state . After all, the only thing more alarming to a state than the presence of a MNC is its absence .
Political action by MNCs also allows MNCs to minimize the extent to which governments can regulate MNCs by taking advantage of legislative processes that are often easily manipulated. For example, states create property rights for individuals and groups in order to protect parties from injuring each other’s property. Individuals and groups (including foreign and domestic firms) constantly vie for more protection and freer access to resources. Successful firms, as Boddewyn notes, are then able to manipulate legislation, raising the “transaction costs of others” which allows them to “exploit the ensuing rents”.
The rise of the MNC has also created, in effect, an international organization that can have an immense effect on not only the economy, but on a state’s government as well. It is always interesting to note, for example, that fifty-one of the world’s hundred largest economic entities are corporations and not countries, or that “the 500 largest corporations account for 70 percent of world trade” . Corporations not only have the political power to influence states, but also the economic clout to devastatingly affect a state’s economy should the state try to oppose a multinational corporation. It is not surprising, then, that states feel unable to formulate effective economic strategies or to plan for the future .
Despite the erosion of state power by multinational corporations, and the fact that they can act independently of states, states still seem to be dominant over MNCs. After all, states still have the right to give legitimacy and to take it away. It is therefore necessary that states remind corporations of this power, forcing MNCs to constantly stand on hostile ground.
Conflicts between MNCs and states will inevitably occur, Ball asserts, because the multinational corporation is a “modern concept evolved to meet the requirements of the modern age” while the state is “still rooted in archaic concepts unsympathetic to the needs of our complex world.” States with strong national pride will take serious offense to the growing amount of foreign direct investment and the cultural erosion that usually accompanies it. States that try to resist free trade and complete integration into the world economy will encounter economic stagnation, leading to a decline in development. States must, then, develop the necessary institutions and legislation to control the influence of MNCs while still encouraging foreign direct investment.