Transnational companies and the financial crisis Grazia Ietto-Gillies

Plan of presentation Transnational companies The contexts of the crisis and TNCs’ developments Key developments in the economic environment Transnational companies and finance Analysis of the crisis Where are we heading?

The transnational company TNC Terminology Activities Specific characteristics TNCs and control Growth Theories

Terminology Noun Companies, corporations; enterprises, firms Adjectives: Multinational (MNCs) International Transnational

Specifics elements of TNCs Ownership of assets abroad via FDI; in at least one foreign country Direct business activities abroad Ability to control those operations

Control Control as ownership: equity stake Strategic and managerial control

Activities Trade: both imports and exports Franchising Licensing Sub contracting Joint ventures (JVs) Foreign direct investment: greenfield or M&As

Growth and changes In 1968-9 the total number of TNCs by the largest 14 investor countries estimated at 7276 In 2009 UNCTAD estimated it at 82, 000 Sectoral and geographical changes Smaller TNCs Growth in all modalities of operations

Theories of the TNC Pioneer work by Stephen Hymer 1960, published 1976 Many, many theories since. Possible to see two approaches in them: Efficiency approach: transnationality driven by costs considerations Strategy approach: transnationality driven by strategy towards rivals, labour or governments

The contexts Technological context Technology and cost of transportation Technology and cost of personal communications Organizational context: linked to ICTs. It is affected by the ICTs and has lead to more investment in ICTs

Organizational context Three major strands of organizational innovation: Organization of production across countries Division of production process in segments to be sited in different countries and/or produced by different firms Involvement of satellite firms in production process organized and controlled by large firms as main centres

The political context 1960s and 1970s: confrontations between governments and TNCs. Nationalizations of foreign TNCs assets From 1980s to early 1990s: co-operation. Privatization with acquisitions by foreign TNCs 1990s and later: confrontation between various groups (NGOs etc) and TNCs

Key developments in economic, social and political environment (1) Deepening of cross-border activities via TNCs Growth in cross border FDI and portfolio Investment. Large privatization programmes Incorporation of Soviet Union and CEE countries into market sphere Rise of China, India, Brazil to world stage

Key developments in economic, social and political environment (2) Slow growth since 1980 compared to post WWII Increasing financialization of economic systems: Stock of financial assets as % of world output from 1.2 in 1980 to 4.4 in 2007 Increase in inequality Increase in debts of private, corporate and state sectors

Some facts in macroeconomies Between 1979 and 2006 the top 1% of US earners share of GDP grew from 10% to 22.9%. For top 0.1%: from 3.5% to 11.6%. World economy grew in per capita at over 3% in 1960s and 70s but only at 1.4% since 1980. In US private investment as % of GDP declined from 18.5% in 1979 to 15.5% in 2007

TNCs and finance Many TNCs operate in the financial sector. In 2009 the world share of outward stock FDI of finance sector was 22%: underestimate Manufacturing companies diversify into services All large companies including TNCs involved in portfolio investment Most FDI via M&As

Analysis of the crisis (1) Crises as manifestations of mismatch between production, demand and distribution sides of the economy Technol. and organizat. developments led to increase in forces of production and therefore in potential capacity and potential output. Absorption problem: high demand needed to absorb potential capacity

Analysis of the crisis (2) Aggregate demand: Consumption: constrained by the changes in income distribution. Few eproducts Exports: world net export are zero Private investment: constrained by low demand and profitability issues Government investment in large projects (environment etc) constrained by politics

Where are we heading? (1) Protectionist policies? Protectionism and FDI More FDI as M&As to cut capacity Changes in geographical structure of FDI More FDI from developing countries and from state companies Restructuring by TNCs may leave smaller companies vulnerable

Where are we heading? (2) Impact of internet on cultural industries Internet and possible strategies by other agents: labour

Conclusions TNCs are part and parcel of the crisis Crisis signals disequilibrium between production, demand and distribution They have to be brought into line to overcome present crisis and to avoid future ones. Regulation of the financial sector is necessary in order to channel more funds into real sector

References Most material from: Ietto-Gillies, G. 2005, Transnational Corporations and International Production. Concepts, Theories and Effects, E. Elgar, chs 1,2. 2010, ‘The economic crisis of 2008 and international business. Can we say anything meaningful about future scenarios?’, Futures, 42, 9: 910-19, November. 2011, ‘The Transnational company and finance’ in Michell, J. and Toporowski, J. (eds), Handbook of critical issues in finance, Cheltenham: Edward Elgar.