Globalization and Development: An International Business Strategy Approach
Globalization and Development: An International Business Strategy Approach
strategy approach
This article seeks to reformulate the “colorful and fluid” early debate on the effects of foreign
direct investment in two ways. Firstly, the wide range of separate specific concerns of the early
debate is subsumed within four generic issues: efficiency, distribution, sovereignty, and growth
and development. Secondly, the analysis is now structured around modes of analysis of
transnational corporations, as the agents that carry out foreign direct investment. Transnational
corporations are seen as using the freedoms of international transfers central to globalization in
order to leverage competitively the differences of national (or other coherently-defined) economic
units.
Crucially this response to difference is analyzed as reflecting three potential strategic motivations:
market seeking, efficiency seeking and knowledge seeking. The core of the article investigates
how the adoption of different motivations by transnational corporations would affect performance
in terms of the different generic issues. The synergies of this mode of analysis with trade policy
(the implicit, or often very explicit, move to outward-oriented industrialization in the era of
globalization) and new growth theory are also discussed.
Introduction
The early debate on the role of foreign direct investment (FDI) in developing countries
has been neatly characterized as “colorful and fluid” (Balasubramanyam, 1985, p. 159).
One reason for the colorfulness of this debate was its emergence within the politically-
charged birth of development economics per se and related attempts to co-opt it into
disparate wider political-economic postures. This points forward to my, hopefully calmer,
concern here with the parallel need to evaluate transnational corporations (TNCs) as
participants in the processes of globalization. Another factor in leaving the early debates
open and fluid was the lack of a commonly agreed methodology for analyzing, in a
convincing manner, an observable mode of international transaction (FDI) with an
obvious potential for a wide-ranging diversity of often intangible or immeasurable
implications. This meant that much early analysis of the developmental effects of FDI
fractured around detailed investigations of specific aspects of a wide range of separate
areas of concern (e.g. extent and appropriateness of technology transfer; job generation
and employment conditions; the allegation of de capitalization; balance-of-payments and
trade effects; bargaining mechanisms; spillovers; industry structure). As V. N.
Balasubramanyam (1985, p. 173) indicates, the emergence of a separate analysis of the
TNC (as the principal source of FDI) and its immediate association with market
imperfections further undermined attempts (e.g. MacDougall, 1960) to formalize the
evaluation of FDI around the constructs
of orthodox trade theory and, in particular, perfect competition.
If early theorizing of the TNC helped to explain the indecisiveness of attempts to evaluate
the implications of FDI, then the subsequent analysis of these firms, now most usefully
positioned at the interface of business strategy and economics, provides methodologies
that are highly attuned to elucidation of issues of globalization and development. Central
to this analysis, and to the lines of argument developed here, is a preference for
organizing an understanding of diversity, rather than simplifying it or assuming it away.
Two vectors of diversity
define the structure of our subsequent analysis.
Firstly, the aims of an evaluation of TNCs in a globalized economy are seen as still
having logical origins in the diversity of concerns addressed in early analysis of FDI.
However, to organize these into a more functional structure, I suggest that these
variegated concerns can be subsumed into an evaluation framework of four distinct
generic issues (Dunning and Pearce, 1994). Within globalization, the opening of national
economies (with an increasing freedom of trade) has been interpreted as allowing TNCs
to improve the ways in which productive resources are used, so that efficiency becomes
an element of the framework through which we evaluate their performance. By contrast
the “flexibility and adaptability” (Balasubramanyam, 1985, p. 160) provided to TNCs by
globalization may limit their need for positive embedded in the growth and development
processes of individual national economies. This provides another concern for the
evaluation framework. However, an important insight of analysis of the growth of TNCs
was that organizing globally through “an internal bureaucracy of the enterprise
transcending the market” (Balasubramanyam, 1985, p. 161) gave them powers “in areas
of pricing of products and technologies”, and in bargaining more generally, that raised
issues of the distribution “of gains between [TNCs] and host countries”; furthermore,
these characteristics of TNCs give them control over dispersed elements of a global
strategy that can be “seen to pose a threat to the economic sovereignty of new nation
states in the Third World” (Balasubramanyam, 1985, p. 161).
The core of this article, therefore, seeks to evaluate the implications of TNCs in terms of
the four broadly-defined issues of efficiency, distribution, sovereignty, and growth and
development. To do this, it is useful to characterize the strategic posture of the
contemporary TNC as one of seeking to use the increasing freedoms of international
transfers, reflecting the essence of economic globalization, to leverage the differences
between economic areas. Such areas may, in practice, be national economies (especially
where policy factors are influential), regions defined by the capacity to support cost
effective production, or the type of technology- and skill-based agglomerative clusters
that build around creative interdependencies and tacit-knowledge spillovers (Porter, 1998,
chapter 7; Birkinshaw and Hood, 2000; Cantwell and Iammarino, 1998;
Balasubramanyam and Balasubramanyam, 2000).
To operationalize this view of the TNC as responding to such international differences, it
is useful to see its overall global strategy as encompassing a number of analytically
separable motivations or priorities. Thus, this framework discerns three strategic aims.4
Firstly, market seeking (MS), in which a TNC invests in a particular economy in order to
supply its established products to the market of that country. Secondly, efficiency seeking
(ES), where a TNC’s operations in a particular location are expected to supply certain
parts of the product range to the company’s international markets in a highly cost-
competitive manner. Finally, knowledge seeking (KS), involves the internationalization of
a TNC’s learning, technology-generation and creative processes. The two aspects of KS
invoked in the subsequent discussion here are product development through product
mandate (PM) affiliates,5 and decentralization of R&D operations (including
precompetitive basic/applied research). The exposition also makes use of the ownership
advantage (OA) and location advantage (LA) elements of John H. Dunning’s (Dunning,
1977, 1993, 2000) eclectic framework.
The aim of the methodological framework outlined here is, ultimately, to understand how
TNCs’ strategic behavior (now conditioned in particular by the forces of globalization)
affects the development of the global economy. The efficiency criterion is explicitly
articulated at this level. However, since the argument then focuses on differences between
components (locations) of this global economy, much of the remaining exposition is
mainly illustrated by the cases of developing countries or economies in transition. It is
not, though, explicitly about (or limited to) these cases, but uses them to exemplify
factors likely to impinge on changes or processes faced by any country (or location)
affected by TNC
Efficiency
Here we address the purely economic concern with the effectiveness (allocative and
productive efficiency) of the use of the world’s fixed stock of resources and capabilities.
Essentially, I idealize the question as “under what conditions do the operation of TNCs in
a host country contribute to raising world economic welfare to a level that could not have
been achieved in any other way?” I can perhaps initiate discussion rhetorically, with the
suggestion that the sustained growth, in recent decades, of the numbers of internationally-
competing firms, alongside the persistent deepening of the global scope of most existing
TNCs, must surely be strongly indicative of such efficiency growth. Immediately,
however, a full acknowledgement of the strategic heterogeneity of TNCs questions the
inevitability of such a prescription. Two aspects of the strategic concerns or behavior of
TNCs can support such doubts.
Firstly, the presence of MS motivation certainly need not support, and often actively
compromises, productive efficiency. Two historical contexts can now be seen as having
generated MS behavior in TNCs. During the interwar years, the economic disruption of
the early 1920s and the later period of sustained economic depression generated high
levels of protectionism in most leading industrial economies. This forced many firms
with a strong established commitment to international markets to extend considerably the
number of countries in which they located supply facilities, with such production
affiliates now predominantly constrained to provide only for the host-national market.
This mode of international supply can be seen to remain dominant in the first two
decades after World War II, as trade protection remained in place but the individual
national economies grew at healthier rates in response to processes of
reconstruction and the confidence generated by an emergent
belief in Keynesian macro policies.
A second historically distinctive wave of MS investment by TNCs occurred in the 1950s
and 1960s, in response to theimport-substitution strategies adopted by many poor
countries seeking to initiate a manufacturing sector. Here again, TNCs had to resort to
tariff-jumping investment in order to retain access to established profitable markets for
their goods, in the face of infant-industry protection. A second significant factor often
conditioned this mode of MS behaviour by TNCs, however, in the form of a dualistic or
highly-inequitable local economy. Thus the availability of significant demand for the
normally middle- and high-income goods that were supplied in TNCs’ existing trade
patterns frequently required the presence of a peculiarly prosperous elite in essentially
poor countries. A concomitant use of capital- and skilled-labor-intensive production
processes by TNCs often meant that they not only supplied an urban elite but also
generated employment and reward patterns that served to reinforce it. Ultimately the
difficulty of sustaining and deepening this form of industrialization, and the limited
potential for such industrial/urban growth to spread into wider forms of development, led
to the abandonment of these import-substitution strategies.
A third, more contemporary and differently focused, use of the MS strategy has also been
observed. Thus survey evidence (Manea and Pearce, 2004a; Lankes and Venables, 1996;
Mutinelli and Piscitello, 1997; Rojec and Svetlicic, 1993) on
the early operations of TNCs in the Central and Eastern European (CEE) transition
economies found that, rather than the predicted extensive ES use of (presumably cost-
effective) inputs, the predominant initial motivation was MS supply of local markets.
Rather than the traditional response to new protection barriers denying access to
established markets, the MS in this case has a more market-development orientation, with
local production and marketing seeking a first-mover familiarity within these new
environments. In fact there may thus be an implicit a priori acceptance of inefficiency in
this approach to the geographical expansion of established TNCs, acknowledging that the
relatively unformulated economic, market and institutional infrastructure of these CEE
economies would preclude optimized decisions regarding immediate supply potentials.
MS entry may here allow TNCs to use their most secure OAs (underpinning supply of
well-established goods) to learn about the real capabilities of CEE LAs, prior to possible
movement to more refined ES operations or even creative accessing of technological and
skilled capacities (KS) (Manea and Pearce, 2004a, b).
These contexts for use of MS strategy by TNCs are likely to generate inefficiency in
several ways. Firstly, the limited markets in which MS behaviour was usually constrained
would be likely to preclude a full realization of plant-level economies
of scale. Secondly, the fact that patterns of production in MS operations were dictated by
the structure of demand and protection in the local economy, rather than its most effective
productive potentials (static comparative advantage), provoked problems of inappropriate
technology transfer. Thus, TNCs again suffer from non-optimization of the use of their
OAs, whilst host-countries do not secure the most efficient activation of their LAs.
Thirdly, the protection against imports and frequent limitations in local competition often
allowed scope for high levels of X-inefficiency. A second strategic context for
understanding that TNC expansion often did not mean achievement (or even pursuit) of
optimized efficiency emerged from pioneering research (Knickerbocker, 1973; Flowers,
1976; Graham, 1978) on oligopolistic interaction in the location decision process. Such
research indicated that many TNC investment decisions (at least in increasingly
concentrated globally-competitive industries) were made more as a subjective response to
moves made by leading rivals than on the basis of an independent objective evaluation of
a country’s LAs in conjunction with the firm’s OAs. Rather than proactively making
location decisions directly aimed to optimize their own efficiency, growth and
profitability, TNCs were often taking defensive options to limit the effect on their
position of rivals’ moves and/or to precisely constrain the benefits pursued by rivals.
Though quite significant elements of MS behavior may
still play important roles in the competitive expansion of contemporary TNCs, changes
central to the evolution of the global economy have moved the focus of their strategic
development elsewhere. Two of these changes explicitly remove the key LAs that
supported earlier MS dominance. Firstly, with the moves towards a free-trade
environment, through the multilateral negotiations of GATT/WTO rounds and the rise of
significant regional-integration schemes (EU, NAFTA, MERCOSUR, ASEAN).
Secondly, the reorientation of developing countries’ industrialization strategies away
from protectionist import substitution towards export-oriented participation in an opening
global economy.7 Taken with a rise in the numbers of major internationally-operating
firms in many industries, the systematic opening of national economies amounts to a
radical intensification of globalized competition for TNCs. At the level of an established
MS affiliate this change was manifest in the removal of protection for its inefficiencies,
through an opening to generalized import competition and, crucially, a more focused
group-level awareness that the particular national market might now be supplied more
cost-effectively by another affiliate through trade. The latter perception is central to
TNCs’ use of freer trade to move towards network supply strategies in which individual
affiliates play the ES role. the key LAs that supported earlier MS dominance. Firstly, with
the moves towards a free-trade environment, through the multilateral negotiations of
GATT/WTO rounds and the rise of significant regional-integration schemes (EU,
NAFTA, MERCOSUR, ASEAN). Secondly, the reorientation of developing countries’
industrialization strategies away from protectionist imports substitution towards export-
oriented participation in an opening global economy. With a rise in the numbers of major
internationally-operating firms in many industries, the systematic opening of national
economies amounts to a radical intensification of globalized competition for TNCs. At
the level of an established MS affiliate this change was manifest in the removal of
protection for its inefficiencies, through an opening to generalized import competition
and, crucially, a more focused group-level awareness that the particular national market
might now be supplied more cost-effectively by another affiliate through trade. The latter
perception is central to TNCs’ use of freer trade to move towards network supply
strategies in which individual affiliates play the ES role. About some degree of efficiency
improvement in the ways indicated here.
Distribution
If the articulation of the efficiency issue could be seen as purely economic, then the
logical follow-on is a more political economic concern with fairness, justice or equity in
terms of how the performance outcomes of TNCs (whether seemingly beneficial or
problematic) is distributed. The premise here is that, since the performance of a TNC
investment in a particular country reflects both the firm’s OAs and the country’s LAs, the
distribution of the outcome should reflect in some fair way the respective contribution of
these inputs. The provenance of distribution issues in early concerns that FDI11 might, in
some sense, exploit (in particular) host developing countries has widened into the
suggestion that TNCs’ positioning in globalization can increase inequalities between
countries and within countries.
The persistence and stridency of debates about equity can be seen to reflect the
impracticality of attempting to define what would be a fair distribution of the outcome
from a particular TNC investment project, or even providing a meaningful summary of
what that distributed outcome actually is (from an overall perspective). This allows for
the intuitive assertion of reasons why a TNC, in particular, may be able to co-opt “unfair”
benefits from investments that may, on other grounds, be effective and desirable. The
problem of categorizing an accurate/ fair distribution derives from the absence of
anything approaching a competitive market price for many of the inputs to a TNC
operation. From the TNC side the intangible and highly firm-specific nature of many of
their OAs leads to their internalized transfer and use, which precludes any form of even
negotiated informed pricing of specific attributes? Whilst many host-country inputs (e.g.
labor, energy, raw materials) will certainly be rewarded in terms of a transparent price, it
is not always the case that the market in which this was determined operates
competitively or is immune to policy-based manipulation, so that elements of
distributional unfairness are again possible. When a significant aspect of the viability of
an operation reflects host-government policies that pursue specific objectives (variants of
import-substitution industrialization) at
the expense of permitting rent-seeking TNC behavior, then any idea of fair “pricing” of
benefits is again meaningless. Though the ”stakeholders” in a TNC operation may be able
to hold clearly formulated views of aspects of its successes or failures, these would
represent elements of very differently composed objective functions. For a TNC, a
particular affiliate would be expected to make distinctive contributions to the current
profitability and/or longer-term competitive development of its overall global operations.
It is central to my analysis that this contribution can take various forms at any point in
time, and also be open to change over time (so that processes of evolution can be
accepted as a reason for temporarily compromised performance). For a host country, the
varied expectations from TNC participation may include improved supply to local
customers (quality and/or price of goods and services), improved conditions for local
inputs (degree of usage and levels of rewards), improved achievement of short-run
government policies (e.g. taxation, industrialization, trade balance) and the provision of
significant impetus to longer-run objectives in terms of sustainable growth and
development. Under these (essentially bounded-rationality) circumstances, a particular
investment may be deemed satisfactory by both “partners” and allowed to progress in an
orderly fashion (i.e. without unanticipated strategic repositioning by the TNC or
additional performance requirements from the host government). This does not imply the
presence of any form of aggregated measure of the overall level of achievement of the
operation or, therefore, of any possible way of specifying what was the actual division of
the outcome between TNC and host-country interests.
Thus, the comparison of actual distribution outcomes with idealized fair outcomes
presents a doubly infeasible calculation, precluding empirical verification of suggested
injustices driving aspects of globalized inequality. Nevertheless, the arguments
demonstrating the implausibility of resolving distribution issues in practical terms also
provide equally precise reasons for a persisting concern, by underlining the presence in
determining the basis for a successful operation (i.e. one satisfying the needs of interested
parties enough to survive) of various market imperfections and policy distortions. These
factors also indicate that in many cases distribution is, in practice, strongly influenced by
explicit or implicit bargaining processes between TNCs and host locations (countries,
regions or, increasingly, creative clusters) in which the parties seek to leverage the unique
characteristics and capacities of their inputs (i.e. in effect claim monopoly prices for their
OAs or LAs respectively). Once again, a crucial factor determining the content and
concerns of such bargaining situations is the strategic positioning of the operation, in
terms of perceived contributions to wider objectives of both the TNC and host country.
The focus of much of the practical intuitive assertion of inequities in globalization is, in
effect, ES behavior by TNCs.
In its most contentious form, one can see an ES strategy as TNCs using undifferentiated
cost-effective host-country inputs to enhance the international efficiency of supply of
highly price competitive goods embodying standardized technology and low skill
production processes. The potential for distributional concerns here reflect a case of
asymmetrical information, in the sense that TNCs may be able to project superior
knowledge of key factors in a bargaining process. In terms of LAs, once a host-country is
not able to assert convincingly any strongly distinctive qualitative characteristics to its
inputs, a TNC may then be in a position to claim a more informed comparative
knowledge of rival economies and thereby suggest a potential for competitive location (or
relocation) of investments elsewhere. Such an invocation of the ‘footloose’ option
represents the bargaining strength accruing to TNCs from operating a global-network
strategy, both in terms of a manifest flexibility and an ability to assert plausibly
possession of better information on comparative productivity than would be available to
an individual host-country government.
Though the OAs used in much ES behavior are in fact likely to be routine and not
significantly differentiated qualitatively between competing firms, the ability to assert
otherwise may still be projected by TNCs. This, of course, reflects the familiar market-
failure argument for intangible or knowledge-based competitive attributes, in that TNCs
will not reveal the detail of the technology or commercial information central to their
bargaining position. Something that may, indeed, differ between potential investors and
that can therefore be “spun” strongly in bargaining processes is the market to which
export-oriented ES supply may have access, both in terms of current size and growth
possibilities. If such elements of asymmetrical information are convincingly projected by
TNCs, they can assert both that their OAs can better develop competitive potentials of a
host economy than could those of rival firms, and that other locations are available to
them with equal or better supply potentials (LAs). This, it could be suggested, would then
lead a host location to concede unnecessarily beneficial terms to a TNC, imparting a bias
to the distribution process.
A generalized capacity of TNCs to exercise bargaining advantages in ES situations would
lead to excessively generous incentive packages (fiscal benefits in terms of tax breaks
and subsidies) and downward pressure on input prices, with a notable emphasis on low
wage-rates and perhaps repressive employment regulations and conditions. One
distributional outcome of this would be worsened international inequality, in that
enhanced benefits would normally accrue to interests in more developed countries
(shareholders and home-country governments benefiting from TNCs’ profitability gains,
and consumers from lower prices) at the expense of reduced benefits in host developing
countries. Furthermore, where TNCs benefit from ES relocation of labor-intensive
supply, this normally places downward pressure on employment levels and conditions in
the home country and other countries in the supply network. Unless governments activate
effective adjustment mechanisms in these countries (as required in the positive efficiency
scenario), the overall outcome would be a deterioration in global income distribution in
terms of a worsened situation for low-skilled labor to the benefit of capital, skilled labor
and higher-income consumers.
In the light of my association of the traditional (import substitution) contexts for MS with
pervasive inefficiency, one may here be dealing with the distribution of losses as much as
gains, though these would normally be interpreted as the costs of protectionism rather
than willfully perverse TNC decision making. From a TNC point of view, it might still
logically impute profitability gains to a particular MS investment, where these represent
the difference between profits now earned through local production and those that could
have been earned through continued external supply under the implemented levels of
protection. It might also feel a clear awareness of losses, however, by comparing the
counterfactual (often “once factual”) profitability of supply under free (or freer) trade
with the lower profitability of the current MS production.
An MS involvement can also be interpreted as providing forms of second best benefits to
a protected economy. In the case of rising generalized protectionism in developed
economies (a counter-globalization scenario), TNCs’ MS investments may provide
offsets to declining employment levels (due to declines
in export sectors), though the protected jobs created are likely to be inefficient and
insecure. In import-substitution industrialization strategies, MS investments create jobs
that would not otherwise have emerged but, as noted in the previous section, these would
be closely associated with an inequitable internal income distribution and usually be too
small in number to be part of a sustainable and balanced development process.
Where an MS operation is implemented successfully, this implies welfare gains for local
consumers compared to the alternative of importing under protection. They may also be
aware, however, of welfare declines compared to importing under a freer trade regime.
Profitability in a MS affiliate should generate tax revenue for the local government,
though this will be offset by some loss in the tariff revenue from any imports that would
have continued without the local production. Where a government is actively pursuing
MS investments, tax rates may be subject to bargaining, probably in conjunction with
levels of effective protection (covering tariff levels for both the final good and any
imported intermediates). Though less clearly established as a matter of public concern,
our perception of globalized knowledge seeking (KS) behavior in TNCs can certainly
also provoke distribution issues (Pearce, 2002; Pavitt and Patel, 1999; Narula, 2003).
Thus, where a KS operation in a particular location achieves success
(in terms of securing original scientific results from a precompetitive basic/applied
research project or the competitive finalization of a significant new product innovation),
this is likely to reflect its position in two technological and creative communities: that of
the host country (its national system of innovation – NSI) and that of a TNC group. The
selection of a particular location for a pure-science research operation will reflect its
established reputation and capacity in an area of investigation of strong interest to a TNC
(i.e. one with a potential to provide new technology capable of driving innovation in the
firm’s industry). Similarly a product mandate affiliate with innovation responsibilities
will emerge where a TNC accepts such an operation’s capacity to leverage distinctive
local creative capacities (scientists, technologies, market research insights, perceptive
engineers, dynamic entrepreneurial management) to complete and operationalize the
development of new goods. However, a presumed ability to use these attributes of an NSI
more effectively than could local industry (an aspect of efficiency in innovation) will
depend on the application of complementary inputs from a TNC. In the case of
basic/applied research a TNC is likely to provide additional funding and, perhaps more
significantly, new scientific questions and complementary scientific knowledge that
enrich the perspectives and potentials of this element of the host-country NSI. The
localized product mandate innovation may also be supported by supplementary inputs of
technology, engineering expertise and market-research insights from elsewhere in a TNC
group. On the one hand, this suggests that TNCs’ globalized approaches to knowledge-
based competitive progress can enrich a host-country’s NSI, both in terms of its scientific
capacity and its ability to operationalize successfully creative potentials. But particular
KS successes are normally seen in terms of their networked positions by TNCs, and
sequential benefits may therefore accrue elsewhere in the group’s operation (rather than
moving “horizontally” within the originating NSI). Thus, exciting new scientific results
from a particular basic R&D lab are most likely to move forward towards commercial
potentials when possible synergies with other results and technologies in other locations
can be realized. Therefore, such results may flow out of the country in a raw-science
state, and have no further local effects. So such successes may well secure further
research projects for the TNC laboratory, but will not have benefited the immediate
competitiveness of the host country. Similarly sustained appropriation of the rewards of
successful new product development in a mandate affiliate is not guaranteed. Though the
innovating affiliate is likely to initiate production of its new product (and thereby secure
early high-value export trade), the international success of the good may soon lead to the
sharing of supply responsibilities with other parts of the group network (for ES or MS
reasons), again limiting the benefits a host country receives from its contribution to the
competitive enhancement of the TNC.
Sovereignty
Here, I briefly review selected aspects of the more politically-oriented concerns with the
ways that economic globalization might undermine the sovereign powers of
governments. This could involve both constraints on the ability to secure the intended
results from implemented policy (e.g. monetary and fiscal) and restraints on governments
in terms of even the meaningful formulation of policies to pursue desired aims in certain
areas (welfare and social policies). In general terms, the theme of such sovereignty
concerns is that the vast opening up of global markets for, especially, capital, technology,
skilled labor, intermediate goods and final products and services, places many
governments in a situation of international policy competition. TNCs can then be seen as
distinctive contributors to such sovereignty concerns, partly because they are major
players in many of these markets and partly because they often, in practice, avoid such
arms-length transactions with internalized transfers between different parts of their global
networks. Though generalized concerns about such aspects of
TNC behavior are longstanding, they become much more strident and precise with the
growth of ES networks. This reflects both the inherent higher levels of intra-group
transfers within such integrated supply programmes and the ability to leverage the
internally-competitive flexibility of their networks in negotiating with host-country
governments (with, therefore, concomitant distribution implications).
The classic illustration of TNCs’ scope to use intra-group transactions to undermine the
effectiveness of a particular host country policy is, of course, the transfer pricing of
intermediates. Here, the prices charged for transactions between parts of a TNC group can
be set at levels to influence the extent of reported profits in a particular location, so as to
minimize the payment of corporation tax in high-tax locations and, thereby, maximize
global post-tax profitability. A country that persists with high tax rates may then get
limited revenue from any international firms (domestic as well as foreign) within its
economy. Alternatively, a country with high levels of TNC participation may have to
abandon any intention of implementing tax rates that are out of line with those acceptable
to those firms as being in line with global norms. Fiscal policy thus becomes constrained
by the international positioning of a country’s industry. Governments may also find that
attempts to attract inward investment in order to generate improved employment
opportunities for their labor supply may then constrain their ability to influence the
quality of jobs and to implement other aspects of welfare policies. Here again, TNCs are
able to play on the footloose potentials of a range of potential locations for their more
standardized production processes, where the discriminating factor derives from costs
rather than any distinctive qualities in inputs. Then, minimum wage legislation, setting of
particular standards for workers welfare, permission of active unionization, and general
attempts to determine employment conditions above levels that appear to be available
elsewhere, can be presented by TNCs as seriously compromising the “natural” value of
host-country labor. As an extreme, it is sometime suggested, TNCs may even project
suspicion of the competitive implications of social democratic publically financed
welfare and social programmes as indicative of a climate unsympathetic to business
interests. In the same way, any attempts to increase levels of business regulation in
general may lead to threats of relocation by TNCs.