lecture topic: transnational production may 8, 2008

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are needed to see this picture.Lecture Topic: Transnational ProductionMay 8, 2008

Professor Timothy C. LimCal State Los [email protected]

POLS/ECON 426 International Political Economy

A global production map for Panasonic

OEM batteries

A global production map for Panasonic

OEM batteries

Transnational ProductionLet’s begin with some questions …

What is transnational production?

What has been the key mechanismin the growth of transnational production?

Why is transnational production important to our lives?

Dynamics of the World Economy

Transnational Production



Just think about your answers for nowJust think about your answers for now

Transnational Production: DefinitionTransnational production occurs when different parts of the production process for a particular product takes place in different national territories





Example: Toyota Motor Co. has a total of 52 overseas manufacturing companies in 26 countries (plus 13 R&D

facilities in 7 different countries). Many of the factories are part of an integrated production chain

Transnational Production: Definition





Almost all automobiles manufactured today, including most Toyota models, are part of an integrated transnational production process.

This means different parts of a vehicle may be manufactured in multiple countries (or locations) and shipped to another country. Parts from around the world will then be assembled in a single location. A Toyota Corolla sold in the U.S., for example, will be composed of parts made in a variety of countries (although the U.S. domestic

content is 70%). An ostensibly American Ford Fusion is composed of 50% U.S-made parts and 50% parts from other countries.

Typical Transnational Production Chain





Cars are composed of thousands of parts. which

may be sourced or produced in a range of locations throughout the world

Cars are composed of thousands of parts. which

may be sourced or produced in a range of locations throughout the world

Transnational Production: Key MechanismTransnational Production: Key MechanismThe key mechanism in the growth of transnational The key mechanism in the growth of transnational production is production is foreignforeign __________ ____________ : more __________ ____________ : more simply known assimply known as

FDI refers to investment made outside the home country of the

investing company in which control over the resources transferred

remains with the investor





direct investment

FDIFDI

Transnational Production: FDI FDI totaled $1.23 trillion in 2006, with the bulk going

to developed economies ($800 billion)

Of developing economies, China receives the largest amount of FDI: in 2006, the inflow of FDI to China was $70 billion, about 20% of the total for the entire developing world (by comparison, all African countries combined received $38.8 of FDI)

While FDI used to flow strictly from the developed to the developing world (and among developed economies), this is no longer true. Examples: in 2004, China’s Lenovo purchased IBM’s PC line for $1.25 billion (Chinese companies are also investing heavily in Africa); more recently India’s Tata purchased Jaguar and Land Rover for $2.3 billion





Press ReleaseMay 2, 2008According to the United States Department of Commerce, the U.S. is the world's largest recipient of foreign direct investment (FDI). In 2007 alone, the U.S. received $199 billion through FDI. In the U.S., more than five million Americans work for companies headquartered overseas.Impact of FDI-creates jobs, boosts wages-increases exports-brings in new technology-increases productivity

Press ReleaseMay 2, 2008According to the United States Department of Commerce, the U.S. is the world's largest recipient of foreign direct investment (FDI). In 2007 alone, the U.S. received $199 billion through FDI. In the U.S., more than five million Americans work for companies headquartered overseas.Impact of FDI-creates jobs, boosts wages-increases exports-brings in new technology-increases productivity

Transnational Production: FDIIt is worthwhile repeating that most FDI flows from developed economies to developed economies: the United States, in fact, receives more FDI thanother economy on earth

Does this mean that FDI is always good for economiesthat receive it? After all, theU.S. economy is clearly nota “victim” of FDI





Transnational Production: FDI

Is FDI good or bad for an economy? What is the “pro” argument?

What is the “con” argument?





In thinking about the question, consider how your answer might change depending on whether an economy is very strong or very weak; whether an economy is already high-wage or low-wage; whether an economy has a

strong state or a weak state, strong domestic firms or weak ones

In thinking about the question, consider how your answer might change depending on whether an economy is very strong or very weak; whether an economy is already high-wage or low-wage; whether an economy has a

strong state or a weak state, strong domestic firms or weak ones

FDI, Good or Bad? A Quick ReviewLiberals: FDI is good; it provides additional resources and capabilities, access to markets, and management skills that might not otherwise be available • Also provides more tax revenue, more efficient use of resources (land, labor, technology, and capital)

Radicals and Mercantilists are skeptical. They are suspicious of foreign firms, and either see the growth of transnational production as new form of imperialism. as a threat to the power and sovereignty of states, or a potential threat to national security





More objections: TNCs also bring in management practices that clash with local customs; their power undermines the growth of local business; in extreme

cases, they use their influence to influence, undermine, or subvert local political regimes

More objections: TNCs also bring in management practices that clash with local customs; their power undermines the growth of local business; in extreme

cases, they use their influence to influence, undermine, or subvert local political regimes

Transnational Production: FDIUltimately, the question, “Is FDI good or bad?” cannot really be answered in the abstract, for the answer will always depend on a number of concrete conditions and factors, including:

The motivations, “nationality” and power of the investor

The relative strength of the economy and domestic firms

The area of investment (is it “strategically vital”?)

The role of states; the characteristics of firms

We also need to keep in mind a truism in IPE/GPE, which is that we live in a world of trade-offs; thus, FDI invariably has both negative and positive aspects for

recipients of FDI, and vice versa





In 2006, Dubai World Ports (UAE) was set to buy P&O, which operated a number of major

commercial seaports on the East Coast. The deal was eventually

canceled due to national security concerns. [More on next

slide.]

In 2006, Dubai World Ports (UAE) was set to buy P&O, which operated a number of major

commercial seaports on the East Coast. The deal was eventually

canceled due to national security concerns. [More on next

slide.]





The Dubai Ports Deal • FDI transactions usually raise little concern in the United States, unless the potential buyer is

viewed as suspicious or untrustworthy. Then, foreign “control” of assets is seen as potentially threatening. This was the case was a state-owned UAE company wanted to purchase the port management business in six major U.S.

seaports, then operated by P&O Steam Navigation Co. The proposed deal met with stiff resistance on national security

grounds. Ironically, P&O is a foreign-owned British company.

The Dubai Ports Deal • FDI transactions usually raise little concern in the United States, unless the potential buyer is

viewed as suspicious or untrustworthy. Then, foreign “control” of assets is seen as potentially threatening. This was the case was a state-owned UAE company wanted to purchase the port management business in six major U.S.

seaports, then operated by P&O Steam Navigation Co. The proposed deal met with stiff resistance on national security

grounds. Ironically, P&O is a foreign-owned British company.

P&O-owned commercial portsP&O-owned commercial ports

Transnational Production: Principal AgentsUnderstanding the implications of transnational production requires recognizing who the principal agents are, and the answer is simple: ___________________________________





transnational corporations or TNCs

The authors note that there is a hodgepodge of terms used to refer to business entities that engage in transnational production and/or FDI; these include: TNCs, MNCs, MNEs, international firms, TNEs, and global corporations. But, we need to be careful: different terms have different connotations. The authors prefer the term TRANSNATIONAL CORPORATION (TNC) because it more accurately reflects the fact that these firms are usually owned and controlled by the nationals of one country and enter into direct

production activities abroad.

Transnational Production: Principal Agents





“A transnational corporation is any enterprise that undertakes foreign direct

investment, owns or controls income gathering assets in more than one country, produces goods or services

outside its country of origin, or engages in international production”

“A transnational corporation is any enterprise that undertakes foreign direct

investment, owns or controls income gathering assets in more than one country, produces goods or services

outside its country of origin, or engages in international production”

NOTE: This definition tells us that not all TNCs are huge, NOTE: This definition tells us that not all TNCs are huge, uncontrollable firms: they vary in size, resources, organizational uncontrollable firms: they vary in size, resources, organizational

structure, and influence potentialstructure, and influence potential

NOTE: This definition tells us that not all TNCs are huge, NOTE: This definition tells us that not all TNCs are huge, uncontrollable firms: they vary in size, resources, organizational uncontrollable firms: they vary in size, resources, organizational

structure, and influence potentialstructure, and influence potential

Transnational Production: ImplicationsIPE/GPE scholars are interested in explaining

The growth of transnational production,

The reasons for the emergence of the TNC, and

The implications of transnational production in general and of TNCs more specifically

While all three issues are important, for our purposes, we will focus on just the third: the implications of transnational production and of the growth of TNCs





Transnational Production: ImplicationsWe have already touched on the implications of transnational production and the role TNCs play in this process, but let’s quickly review the basic positions …

Liberals: FDI is good; it provides additional resources and capabilities, access to markets, and management skills that might not otherwise be available • Also provides more tax revenue, more efficient use of resources (land, labor, technology, and capital)

Radicals and Mercantilists is problematic. Foreign firms cannot be trusted, so the growth of transnational production is potentially a new form of imperialism, a threat to the power and sovereignty of states, or a potential threat to national security




Transnational Production REVIEW

The authors tell us that both views are flawed

Transnational Production: Implications

According to the authors, the basic flaws are clear …

The pro-TNC (liberal) approach fails to think about power in the market

The anti-TNC (radical and Mercantilist) approach gives no credence to governments’ ability to shape economic policy, and/or fails to appreciate fully the structural changes that have already taken place in the world economy





So what’s the better view?

Transnational Production: AssessmentWe must take a number of clear steps …

First and to repeat: We must avoid the trap of dichotomous thinking reflected in the liberal and radical/mercantilist debate on FDI, TNCs, and transnational production

Second (another repetition): To assess the implications of FDI, TNCs, and transnational production, it is necessary

to focus on a specific country and firm characteristics,

rather than assuming a general orientation of firms and countries





We’ll return to these points shortly, but first a few general points…

Transnational Production: AssessmentGeneral Points. Despite the warning against assessing the implications of transnational production at too general a level, we can start off with some basic points …

Production has become increasingly globalized

The global production system is dominated by rapid developments in the technological environment, and new technologies have placed innovation at the center of profitability

One of the major reasons for the growth of transnational production has been the accelerated reduction in international transport and communication costs

Innovations in finance has facilitated global production- continued on next slide -





Transnational Production: AssessmentGeneral Points regarding transnational production …

The globalization of production has been influenced by the policies and politics of national governments

Construction and maintenance of Bretton Woods system American interests in promoting outward expansion of

American business enterprises Shift by developing countries to attract foreign invesment

(e.g., EPZs)

The globalization of production is a response to changing organizational patterns with firms, and changes in the wider system of production

Shift from Fordist to post-Fordist production Mergers, strategic alliances and joint ventures





Transnational Production: AssessmentThe upshot is this: transnational production is driven by a host of factors, both structural and non-structural

Parts of the process may be automatic, but important parts are not (which means that agency plays a big role)

Key agents are not just TNCs, but also national and even local governments and, perhaps, other non-state actors and movements

Transnational production is a comprehensive process, meaning it involves not just the production structure, but also the finance, knowledge and even security structure: power is clearly at play, but not in a simple one-dimensional way





Transnational Production: AssessmentIt is important to highlight the political dimension of transnational production … why?

Answer: proponents of transnational production--sometimes just referred to as globalization--often argue that it is a largely uncontrollable economic and/or technological process; globalization, in this sense, is portrayed as something that happens to us, rather than something we can control

This has very important implications: if you believe this view of globalization, then there’s really nothing we can or should do to stop it, or even to manage it: we simply have to let it run its course





Transnational Production: AssessmentOn the other hand, if we recognize the political aspects of transnational production or globalization, we understand that there’s nothing automatic about the process: it is something we can control or better manage, so that it’s effects are less destructive or more beneficial to a wider range of people and countries

This is the position the authors adopt …





Transnational Production: AssessmentReturning to the basic question: Is FDI good, bad or something else?

According to the authors, the answer lies, in large part, in what governments do or are able to do

They argue that, for FDI to have a broad positive benefit, states or governments must play a proactive role in deciding what type of FDI to encourage, and in controlling what foreign investors do once they set up operations

The authors, in short, assert that the “visible hand” of the state must be used to manage the market process





Transnational Production: Assessment

What states can do?• One thing governments can do is to ensure that FDI

is used to upgrade the quality of the labor force, or by requiring that foreign investors develop sub-contracting relationship with local firms

• Another important task is to ensure that domestic firms gain access to new and appropriate technologies through, for example, joint ventures





Unfortunately, all of this is easier said than done. As the authors recognize, many governments in the developing world are no match for the productive, financial and

knowledge power of the largest TNCs

Unfortunately, all of this is easier said than done. As the authors recognize, many governments in the developing world are no match for the productive, financial and

knowledge power of the largest TNCs

Transnational Production: Assessment

What states can do? In addition, because the world economy is so

integrated, states are often in competition with other states for FDI

This creates a situation that allows TNCs to play off one state against another to achieve the best deal (this is called regulatory arbitrage)

The changing relationship between states and firms is the topic of another important section in the chapter: State-firm interactions





“The issue of the net impact of FDI on host societies is intimately connected with the wider question of the changing relations between the state and the firm.”

“The issue of the net impact of FDI on host societies is intimately connected with the wider question of the changing relations between the state and the firm.”

A Question …

Why or how state-firm relations changing in

the new global economy?





Globalization and State-Firm InteractionsPrior to the era of transnational production--when firms were generally confined within national boundaries--they relied on the state to represent their interests at the transnational level

Today, this is becoming less and less true: indeed, many scholars believe that the nature of the relationship has changed in a fundamental way. Instead of firms relying on states, states not rely (increasingly) on firms

In this regard, one of the biggest changes is the erosion of sovereignty





What is sovereignty? Why is it important?

What is sovereignty? Why is it important?

Globalization and State-Firm InteractionsSovereignty, a basic definition

The supreme and independent power or authority in government as possessed or claimed by a state or community

Historically, the sovereignty and, therefore, the power of a state lay in its ability to achieve compliance to whatever it commanded within a territorially defined space

Border lines physically defined what was territorially sovereign and what was not. If a state’s sovereignty was challenged from outside its territory, it could resort to force to maintain control.





So how are firms challenging sovereignty?

So how are firms challenging sovereignty?

Globalization and State-Firm InteractionsSovereignty is challenged through strategies that rely on the relative mobility of TNCs compared to the relatively immobility and geographically limited reach of states (which, ironically, is limited by a self-imposed recognition of sovereignty)

Hedley points to three developments that underlie the transnational corporate “threat” to state sovereignty:

the permeability of borders

mobility across borders

border straddling





Borders ain’t what they used to be. The IT revolution, for example, has made it very difficult for states to control what gets in and what gets out in terms of

information and ideas. Globally connected networks make it increasingly

easy to transport, smuggle or traffic goods, services and even people

Borders ain’t what they used to be. The IT revolution, for example, has made it very difficult for states to control what gets in and what gets out in terms of

information and ideas. Globally connected networks make it increasingly

easy to transport, smuggle or traffic goods, services and even people

Crossing borders used to require a great deal of time, money, effort and even

danger. Today, this is less and less the case. Crossing borders is faster, easier,

less costly and less dangerous (with obvious exceptions) than its ever been

Crossing borders used to require a great deal of time, money, effort and even

danger. Today, this is less and less the case. Crossing borders is faster, easier,

less costly and less dangerous (with obvious exceptions) than its ever been

Corporations and other actors increasingly occupy space in different sovereign jurisdictions, which makes it difficult to determine which sovereign

jurisdiction takes precedence over which corporate activity

Corporations and other actors increasingly occupy space in different sovereign jurisdictions, which makes it difficult to determine which sovereign

jurisdiction takes precedence over which corporate activity

Globalization and State-Firm InteractionsTaken together, the permeability of borders, mobility across borders, and border straddling, these have given TNCs increasing freedom and power

In particular, they are able to take advantage of between-border variability

Consider this: Different states have different laws and standards regarding all aspects of economic activity. Because of these differences, TNCs can pick-and-choose among different sets of regulatory frameworks and strategically play off one country’s set of rules against another

Thus, while TNCs increasingly operate in a de facto borderless world, de jure political and legal distinctions still mark the boundaries on a world map comprised of nation-states





Globalization and State-Firm InteractionsHistorically, between-border variability enhanced the notion of sovereignty by demonstrating that each state was free to establish its own course, and variable customs, laws, and procedures helped to define territorial jurisdiction

In today’s world, variability among states diminishes sovereignty

This represents the crux of the new form of interaction between

TNCs and nation-states





Globalization and State-Firm Interactions

All of this raises important questions, not the least of which is this: Is a world increasingly subject to corporate governance (orcorporate rule) a

good or bad thing?





lecture topic: transnational production may 8, 2008

Documents

worldtransnational production

nowtransnational production

transnational productionmay

different parts

different countries

developed economies

entire developing world

thousands of parts