Sources and Limits of Mnc Power
What are the sources and limits of MNC power? 1. Introduction The purpose of this essay is to give a (more or less) detailed overview over the sources and limits of the power of multinational corporations (MNCs), as MNCs are getting increasingly important as actors in political bargaining. Many other important aspects, such as the history or the financial management of MNCs, would by far exceed the scope of this paper. To make the topic clearer I want to start with some definitions in the first section.
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Thereafter, the most important sources and forms of business power shall be examined, before taking the limits and the vulnerability of MNC power into account. 2. Definitions In this essay the term MNC refers to “a firm, which owns assets and controls activities in different countries. ” This means that a corporation needs at least one subsidiary in a non-domestic country to be classified as an MNC (just foreign trade is not sufficient). The second term, which needs to be defined, is power. Hereafter, power will refer to “the ability of actors to pursue successfully a desired political objective. As we will learn in the next section, there are different sources and forms of power, which can all be subsumed under this very broad definition of power. 3. Sources of Power It is uncontested that MNCs are powerful political actors in the globalising world. Nevertheless, the sources of this power are not always obvious because of the intransparent structure of global politics. I want to concentrate on three of the most unchallenged sources/forms of business power for this reason. Firstly, one source of MNC power is their size.
As they can benefit from substantial economies of scale/scope, they do not face too much competition. As a result, they operate in oligopolistic markets. For this reason one could say that states or international organisations should intervene because a market that is dominated by an MNC is not Pareto efficient and therefore causes social welfare costs. But does this theory hold? In my opinion the opposite is the case. Obviously, oligopolies are not as efficient as perfectly competitive markets. Nevertheless, if there were ust domestic firms, there would be many firms with substantial market power too (perhaps even monopolies). The entry of MNCs in a foreign market can even increase the allocative efficiency of the host market, because the domestic firms in that market have to react and to increase the competitiveness of their operations. This would result in an improved overall efficiency and the host country would certainly benefit from the entry of the MNC. Another important source of MNC power, which is certainly linked to size too, is that they own a huge amount of both financial and technological assets.
As countries that want to expedite development depend on foreign capital and technology transfer, they try to attract MNCs by setting investment incentives (for instance tax breaks). But this power does not abruptly stop after the market entry of an MNC because MNCs can easily withdraw from the foreign market again, if they don’t like the host government’s activities. I believe that governments are well aware of this exit option and therefore have little choice. They almost have to set MNC-friendly policies, which makes them agents of the MNCs to some extent.
But surely they benefit extensively from this partial loss of control, as the market entry of MNCs is likely to trigger further development and to heighten living standards. Therefore, MNCs can be seen as a solution to underdevelopment. The sources in the previous two paragraphs are part of what Fuchs calls structural power, because they are a result of the mere existence of MNCs and not of MNCs’ activities. This makes it difficult to measure structural power because it is a system-immanent form of power, which is more or less invisible.
The next source of power is visible though and can therefore be subsumed under the term ‘instrumental power’: Many MNCs try to actively influence governments by lobbying or campaign financing. In my opinion, a famous example for this form of power is Goldman Sachs. They do not only have extremely good relations with the government, but also benefit from the fact that many of their former top executives go into politics afterwards (for instance Henry Paulson or Robert Rubin).
This gives them a huge indirect power, because in many cases they do not even have to influence politicians, as they are ‘their own people’ anyway. As a result, the Rolling Stone Magazine published an article, which stated that “Goldman Sachs is everywhere”. The third major form of power (which is often seen as the most powerful power) is actually discursive power, which mainly means that MNCs can only have strong political influence, if they are granted political legitimacy by society itself.
This legitimacy can be achieved by MNCs through public trust. There are several instruments that can lead to public trust, such as self-regulation or PPPs. Moreover, some firms also use CSR activities and pretend to represent a stakeholder approach just to increase their discursive power and not because they really care about societal issues. All in all, one must say that discursive power is not only the most powerful power, but also the most dangerous power if it is lost because of its fragility and its efficacy.
We explore this in the following section. 3. Limits of power As we have seen in the previous section, MNCs are extremely powerful. However, I think it is necessary to take the scale of power into account before two of the most important limits of MNC power will be discussed. There are two major competing views: on the one hand Hymer’s radical view, which argues that states are dominated by MNCs that just try to exploit the world to their own advantage.
On the other hand, there are supporters of a state-centred position, which suggests that there are (almost) no really global, stateless firms and that MNCs are still very much linked to their domestic state. In this paper, I want to concentrate on the latter for the following reasons: Even if MNCs have substantial political power, the ultimate political decisions are made by the original policy-makers (government, bureaucracy) and MNCs have to operate within the political and legal framework, which is provided by the former (even if they can of course influence this framework).
Moreover, I would say that most MNCs are not really global due to the regionalisation of FDI (more than 60% of FDI is concentrated in the US, Europe and Japan). Nevertheless, I think that firms will become more global in the future, as diversification regarding FDI could reduce the risks they are exposed to because the performances of distant economies are not highly correlated with the own performance. In my opinion, corporate globalisation is a process just as globalisation itself.
This path surely leads to stateless MNCs; however, we have not reached this state yet. The first major limit I want to discuss is the interdependency between state, business and NGOs. Even if MNC power has risen over the last few decades, it has become much more difficult for them to achieve their goals in the bargaining process. This is due to the fact that political negotiations are now multilateral in nature (in contrast to the prior bilateral negotiations between business and states) because NGOs and international organisations have become more powerful too.
NGOs can be seen as natural enemies of MNCs that want to implement international regulatory regimes (which MNCs want to avoid usually). But, in my opinion, NGOs are not the biggest enemies of MNCs. The biggest ‘enemies’ of MNCs are other MNCs. Admittedly, MNCs often form alliances with each other, but these alliances are very unstable because the allies are competitors normally. I think the fact that MNCs compete with each other and cannot act as a unity in the long term is the most important limit of their own power.
Another critical factor is the fragility of business power. Even if MNCs benefit from public trust at the moment (due to the predominant neoliberal societal norms), their discursive power could be short-lived. If a considerable change in societal norms takes place or if individual MNCs are hit by scandals, this could be a significant threat for MNCs’ political legitimacy. Therefore, business power is extremely vulnerable and MNCs must be cautious to maintain their power.
This is why they have to comply with societal and moral rules, which is no doubt a significant limit of independency. 5. Conclusion By and large, MNCs are gaining power as globalisation proceeds. Nevertheless, there are limits of their power that force them to have to consider societal and environmental issues in their operations. Moreover, MNCs are definitely a solution to underdevelopment and are highly beneficial for developing states due to the technological transfer.
Therefore, I think that MNCs are not too powerful yet, even if there is a threat that they might dominate political rule-setting in the future. As long as multilateral bargaining is assured, I can see no reason to additionally limit MNC power by increasing regulation of MNCs. Certainly, the time will come when MNCs are too powerful, but currently I am convinced that social benefits still exceed social costs caused by MNCs, as they are not able to exploit the whole world due to the existent limits of power.