The above-mentioned principles imply the complementary positions of both players. It is obvious that if a multinational corporation decided merely on the basis of the aforementioned natural factors, and the host country’s government was able to ensure the safety of the invested capital (as well as other factors, as indicated below), there would be a continuous slow and mainly uniform circulation of resources around the world – i.e. the absolute antithesis of the Marxist system of the advanced core and a dependent periphery of less developed countries. The reality is different though. The liberal tradition in FDI remains unfulfilled because 70 percent of FDI is realized between the European Union (EU), USA and Japan (UNCTAD 1998). It is necessary to include the position of the investor’s home country in our thinking, i.e. the developed market economies (DME). DME countries respond to the existence of multinational corporations in full accordance with the mercantilist tradition in two different ways. Firstly, in pursuing their national interest they will not allow world investments to be allocated by the market, as they would relocate into new areas too dramatically. ‘It quickly became clear that the overwhelming proportion of direct investment occurs among the similar, high-income developed countries, not between dissimilar countries. “North-north” investment dominates “northsouth” investment even after correcting for income levels and other determinants’ (Markusen-Maskus 1999:3). To ensure that the investments are diverted, there are systems of incentives for investors, i.e. programs of subsidies for multinational corporations investing in various countries. These programs have begun to be introduced even by countries which are still liberal in this regard, as a means of self-defence. The more advanced a state the ‘better’, meaning a larger program for investors. It is therefore not surprising that the countries of Western Europe are more active in the use of incentives than other European countries. ‘A significant number of governments of developed and developing countries fell into competition with the others through incentives in order to obtain MNCs’ investments. These investment incentives tend to divert FDI flows in favour of developed countries, due to their ability to offer essential financial incentives’ (Kumar 2001:16). The advent of investments in some developing countries in the 80s coincided with the expansion of incentives and privatisation in these countries. Secondly, developed countries support the existence and further development of their national multinational corporations. This has two effects. The MNC support by parent states5 results, along with the willingness (or necessity) to establish extensive subsidy programmes in an increased tax burden, and thus strengthens the government’s role in the economy; at the same time it excessively strengthens the MNCs at the expense of other types of companies. 5 For example, the United States allows its multinational corporations to deduct the tax paid to the government of the place of investment from taxes paid in the USA. – 98 –
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Multinational corporations invest in enhancing their competitive advantages, namely technology, and strengthening their position in the global market. That leads to intensified competition and the application of offensive and defensive MNC strategies. Another effect is the redirection of FDI which flows from their natural directions back to the developed market economies. Tab 3.6: Fifteen largest MNCs according to turnover in billions of USD
1971
1996
2005
MNC
turnover
MNC
turnover
MNC
turnover
1.
General Motors
28.3
General Motors
158.0
Exxon-Mobil
359.0 312.4
2.
Exxon
18.7
Ford
147.0
Wal-Mart Stores
3.
Ford
16.4
Royal Dutch / Shell
128.3
Royal Dutch / Shell
306.7
4.
Royal Dutch / Shell
12.7
Mitsubishi
127.4
British Petroleum
253.6
5.
General Electric
9.4
Exxon
117.0
Chevron Corp
193.6
6.
IBM
8.3
Toyota
109.3
General Motors
192.6
7.
Mobil Oil
8.2
Mobil Corp.
80.4
Daimler Chrysler
186.5
8.
Chrysler
8.0
General Electric
79.2
Toyota
186.1
9.
Texaco
7.5
IBM
75.9
Conoco Phillips
179.4
10.
Unilever
7.5
Daimler-Benz
70.6
Total
178.3
11.
ITT
7.3
Volkswagen
64.4
Ford Motor
177.0
12.
Gulf Oil
5.9
Siemens
62.6
Mitsubishi Corp.
168.7
13.
British Petroleum
5.2
Nissan Motor
53.8
General Electric
149.7
14.
Philips
5.2
Unilever
52.2
Volkswagen
118.6
15.
Standard Oil
5.1
FIAT
51.3
Altria Group
97.9
Source: UNCTAD (1998), UNCTAD (2007)
Eventually, the vicious circle of underdevelopment in affected developing economies expands, as they remain under-capitalised. Venables (2000) in his recently constituted theory of new economic geography deals with the The Post-War Development of the World Economy – 99 –
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optimal allocation of capital proposed that out of the three factors of production, only capital is internationally mobile. He concludes that under these conditions, capital moves fairly close to the original economic centre (DME countries). Thus, only a group of close-by developing countries, which are already among the richest ones, can benefit from it, albeit more intensively. Conversely, the outermost states, usually with relatively lower income, remain unaided. As a result, there is high-quality, continuously improved technology available to MNCs, but also an illiberal system, where the capital and investments circulate quickly, but unevenly, and almost exclusively among the developed market economies. In the 70s and 80s, foreign investments were dominated by banks and foreign portfolio investment. The most exclusive among them were American international banks that lent money to countries with medium levels of income. Unlike FDI, which would gradually replace it, FPI is very sensitive to some overall macro-economic indicators. To avoid a major outflow of FPI from the target country, the host country must constantly meet the following conditions: 1. 2. 3. 4. 5. 6. 4. 5. 9.
economic growth favourable interest rates stability of the relevant exchange rate portfolio liquidity convenient capital transfer transfer of profits abroad at low cost stable banking system and reserves accounting standards and auditing quality a good regulation of the securities market
The two oil crises, however, did not create a situation which would satisfy the above-mentioned conditions. Thus capital was rapidly being transferred from the mainly developing countries that were most affected, which consequently worsened the crises due to a lack of capital. While the influx of FPI in developing countries was declining, the share of the developed countries in the total amount of foreign investment was increasing. The FDI boom over the 80s and 90s had been caused by several factors. The decreasing costs of technology, telecommunications and computer technology in particular helped businesses to invest and operate in several countries simultaneously. Some areas of the world, such as South East Asia, experienced massive economic growth, opened up to world investment flows, and began to subsidise export-oriented manufacturers significantly. The collapse of the Soviet bloc opened up more opportunities in countries hungry for Western goods and investment. In the 90s especially, developing countries opened up to international capital and implemented a relatively extensive privatisation – 100 –
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