Seminar Paper for Theory of International Relations

Theme: A New Global Political Economy

Prepared by :
Shpetim Muslii

Mentor :
Prof. Dr. Ferid Muhic

Table of Contents

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Introduction.......................................................................................................................3
Great expectations.............................................................................................................4
TNCs and foreign trade.....................................................................................................5
Demand for unskilled labour.............................................................................................6
Re-evaluating the Mexican success story..........................................................................7
The Mortimore...................................................................................................................8
Immiseration......................................................................................................................9
References.......................................................................................................................10

Introduction
The three country-regional studies, presented in separate chapters, are: of "Internationalization
of industrial firms" in the Nordic countries by Pontus Braunerhjelm, Per Heum and Pekka YlAntilla; on the effects of transnational corporations (TNCs) in East and Central Europe and
Russia by Mihaly Simai,and on Mexico by Michael Mortimore.
The Nordic study brings out that there has been a negative substitutional effect of foreign direct
investment (FDI) by technologically advanced firms in domestic industrial production, while the
growth effects are more ambiguous. And the outward investments of Nordic firms in the former
socialist economies (Baltic states and the Russian Federation) have resulted in an acceleration
of structural change in the home countries, with decreasing employment in low-skill and lowtech industries.
However, the study concludes, new capital controls on outward FDI do not consitute a policy
alternative. Instead, policy efforts should attempt to promote the strength and competitiveness
of the domestic industrial base to attract internationally competitive footloose firms, whether they
are of domestic or foreign origin.

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The policy emphasis needs to move more and more rapidly from product markets to factor
markets. The main task of industrial policies of small advanced economies is to ensure that the
elements determining competitiveness create a favourable environment towards areas with
positive externalities - above all, education, technical and social infrastructure and R & D. The
policy goal should not be the reallocation of existing resources but rather the quality and
quantity of resources for the future.

Mihaly Simai, in his chapter on TNCs and the former socialist economies, notes there had been
expectations in the West and the East in relation to the direct and indirect role of TNCs in the
transition to the markets. The new governments had expected a very fast increase in FDI in
important branches of the economy that could change rapidly the economic position and
performance of these countries in the world market by introducing new technologies, new
production and processes, expertise and skills, and, at the same time, promoting exports. Some
of the governments had also looked to the TNCs primarily as sources of new capital.
And while FDI to these countries grew rapidly between 1990 and 1994, much faster than the
global average, and the FDI stocks increased rapidly, in 1994 they represented less than 1% of
world stock of FDI and, in per capita terms, about 11% of the world average.
And while it is too early to draw a firm balance on costs and benefits, the expectations of a new
gold rush have not materialized so far, though the impact of TNCs has been greater than the
volume of investment flows and stocks would suggest.
In macroeconomic terms, the structure of investments by TNCs in the former socialist countries
has reflected more the motivation of foreign investors than the declared priorities of host
countries. A large part of the FDI has been concentrated in highly profitable trade and services
sectors, which do not require large investment commitments. Less than half has gone into
manufacturing and about one quarter of the total ventures are mostly in middle- or lower-level
technologies.
In Russia, almost 50% went to fuel industries, 10% to extractive branches, 10% to construction
industries and close to 11% to trade and transport.
With regard to privatization, domestic policies for rapid privatization with foreign participation
received strong support and impetus from the World Bank, IMF and Western governments.
Fiscal motivations, including increase of foreign exchange inflows, dominated the expectations
of the transition governments, especially the heavily indebted countries, who looked towards
privatization for reducing budgetary deficits. And local entrepreneurs had no or very little capital
to purchase state enterprises.
Between 1990 and 1994, about 40% of the total inflow of FDI was related to privatization. The
role of foreign firms in this area has been complex. Privatization involving TNCs has been
concentrated predominantly in large-scale and strategically important industries like
telecommunications, oil, transport equipment and chemicals.
Some of the governments, and academia, entertained great expectations concerning the
technological transformation of these economies as a result of the entry of TNCs. There had
been high hopes that their oversized research sector would be one of the first to profit from the
global sourcing activities of TNCs in knowledge-based industries.
So far, this has been achieved only on a very limited scale. Some of the Western firms have
been especially interested in getting the achievements of defence-related R&D in Russia.
But TNCs, in general, proved to be reluctant to undertake significant development activities
outside their home country, except in highly specific cases, when foreign scientific capabilities
offered something extraordinary.
And while there have been some green-field investments that have contributed to the
modernization and restructuring of important branches of these economies, they have
concentrated on middle-level technologies.
New ventures with foreign capital have contributed to the introduction of new products and
services for consumer markets, and, in certain branches, to exports, including integration into
the international supply system of the given TNCs.
But in many cases, product innovation meant the introduction of the brands of the TNCs which
replaced the existing and often much cheaper (though technologically inferior) domestic brands.
In some countries, particularly in telecommunications, the FDI contributed to the increase in and
upgrading of services and output.
But expectations that the inflow of FDI would result in increasing demand for local
subcontracting have not been met; the potential even in the more successful instances, has not
been fully realized.
Empirical experiences suggest that in general, TNCs use fewer domestic inputs than
comparable domestically ownedfirms.

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Great expectations

TNCs and foreign trade

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In terms of foreign trade and external market integration, the contribution of foreign firms to
export and import trade has been quite important. As the affiliates became integrated into the
global production and supply operations of some TNCs, a part of the foreign trade of those
countries became a part of the intra-firm trade, implying that along with exports, there was also
a simultaneous increase in imports.
As a result of the role of internationally owned firms in foreign trade, the use of transfer prices
made the effect of the FDI operations less transparent and national welfare effects more limited.
By the mid-1990s, it was still not clear to what extent the TNCs had contributed to high valueadded export production in the transition economies.
While the activities of TNCs are opening up new career possibilities for talented young experts
in their international network, the positive employment effects from green-field investments have
been more than counterbalanced by the negative effects of rationalization in firms taken over by
the foreign entrepreneurs.
"Downsizing, rather than an increase in employment, could be observed as a result of the
spread of foreign firms."
And while it would be too early to draw any conclusions on the overall income effects of FDI,
"the available sporadic data indicate its contribution to the growing income inequalities."
The TNCs in the former socialist countries of Europe have a much stronger bargaining position,
based on their market power, than the private or state-owned firms of host countries. The power
of the TNCs has also been greater than that of governments which were inexperienced, hit by
economic and social difficulties and functioning under external and internal constraints after the
collapse of the socialist regimes. The TNCs thus enjoyed special advantages in acquiring stateowned firms.
In the past, Simai observes, in the industrial countries too, relations between the foreign sector
and the national economy had posed a difficult problem. Even in the 1990s, when capital
movements have become liberalized and the differences in legal conditions applied to foreign
and local enterprises are disappearing, there are problems with the assimilation and integration
of the TNC subsidiaries.
"Practically no industrial country could develop a unified liberal policy framework for trade,
capital movements, international entrepreneurship and migration. This is even more so in the
countries which are at a lower level of development. In addition, the former socialist countries
still have a number of different constraints in the integration of foreign firms."
And while certain segments of the national economies of the transition countries may become a
part of the internationally integrated production systems of TNCs, there is a danger of evolving
duality in the economies as a result of the increasing gap in performance between the foreign
sector and the rest of the economy.
TNCs have proved, Simai concludes, that they, in general, are themselves not interested in
curing sick economies. As they are primarily motivated by the interests of their system and not
those of the host-country, they may even aggravate certain "diseases" by taking a large share of
the host-country incomes, facilitating capital flight, overpricing and other sophisticated taxevasion practices. And their monopolistic position in domestic markets may reduce or eliminate
the advantages offered by competition.

Demand for unskilled labour

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In his paper on "International Trade, Outsourcing and Labour," which is also included in the
book, Edward Amadeo notes that there has been an increase in trade flows between developed
and Latin American countries as well as an increase in FDI since the 1980s. According to the
conventional view on international trade, countries will specialize in the production of goods
which use more intensely, the more abundant factors of production.
Hence, if unskilled labour is the relatively abundant factor of production in developing countries,
the reduction in trade barriers and increase in trade flows will tend to increase the relative
demand for labour in favour of unskilled workers in these countries, thus increasing their relative
wage.
Other things being equal, TNCs will invest in countries in which the cost of labour is lower. And
since this condition is satisfied in developing counties, there would be a tendency towards
relocation of certain industries to developing countries. Deregulation of labour markets and
reduction in the cost of labour would tend to increase the incentives for TNCs to invest in
developing countries.
Thus, the increase in trade flows and greater penetration of TNCs in Latin America should
increase the relative demand for unskilled labour, thus increasing their employment
opportunities.
However, evidence so far shows that the trends are in the opposite direction. Relative wages
have moved in favour of the more skilled workers and the size of the informal sector has been
increasing.
To the extent that the evidence shows a long-term trend, it seems to imply that there are some
other factors affecting relative wages.
In Amadeo's view, both changes in technology and management methods may be increasing
the relative demand for skilled labour in developing countries, and in Latin America in particular.
The long-term effects of greater FDI on the structure of employment and relative wages
between skilled and unskilled workers, and between the formal and informal segments of the
labour market, are still uncertain.
On the one hand, there might be positive effects on the size of the formal sector associated with
greater investments. But to the extent that these investments have an anti- unskilled-labour bias
(due to technological factors), the effect on the size of the formal sector and the relative wage of
unskilled workers might be negative, Amadeo adds.

Re-evaluating the Mexican success story

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Looking at what he calls the TNC-centric industrialization process in Mexico, Michael Mortimore,
a senior economist at the Economic Commission for Latin America and the Caribbean (ECLAC)
and author of several studies on TNCs in Latin America, notes that Mexico is one of the success
stories in Latin America most often cited by institutions promoting the Washington (neo-liberal)
Consensus on economic policy.
But the Mexican experience also shows some worrying trends. Capital inflows, combined with a
decline in the level of domestic savings and a persistent trend towards revaluation of the
exchange rate, implied a current account deficit (which ultimately led to the peso crisis in 199495).
The Mexican results, both the positive (renewed growth, capital inflows, increased and
diversified exports, and reduced inflation) and the negative ones (foreign exchange crisis, trade
and current account deficits, and weak capital formation), are outcomes directly related to the
adoption of neo-liberal policies oriented towards reducing the role of the state in the economy,
Mortimer notes.
Mexico's success in breaking out of the debt crisis of the 1980s and strengthening the
international competitiveness of some leading industrial sectors, such as automobiles and
electric machinery and electronics, makes it a very special case.
In international trade, its export growth has been spectacular, and eight of the ten principal
Mexican exports to the OECD are in the list of the 50 most dynamic industrial groups.
But in spite of a higher export propensity, foreign firms' imports into Mexico also continue to be
very significant, and its foreign trade balance shows a deficit. Mortimer's analysis is borne out
by the performance of the automobile and electronics sectors.

The Mortimore
The Mortimore analysis of the Mexican experience in the automobile sector contrasts with the
positive, and somewhat "gushing", assessment in UNCTAD's 1995 World Investment Report
(WIR) of the TNCs' role in restructuring the Mexican automobile sector. The bibliography in that
WIR (which advocated a multilateral framework on investment) includes some of the Mortimore
studies, but not the one presented at the WIDER meeting, though some draft manuscript
versions had been available even at that time at the UNCTAD secretariat, which was having
some collaborative projects with ECLAC on TNCs.

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Vehicle producers responded to the liberalization of the Mexican economy by building modern
and internationally competitive plants. And when the Mexican market collapsed in the early
1980s, the period coincided with the implementation of new corporate strategies on the part of
US vehicle producers operating in Mexico.
The FDI in Mexico by the US automobile TNCs was aimed at defending their national market
from import penetration by Japanese and other producers. General Motors, Ford and Chrysler
came to the conclusion that Mexico could become a low-cost export platform for entry-level
front-wheel-drive four- and six-cylinder small cars.
The three US manufacturers expanded their Mexican production and reoriented it towards
export. The transformation of the Mexican automobile industry towards international
competitiveness was the work of the Big Three US manufacturers.
In terms of productivity and quality, the new production facilities caught up with, and in certain
cases surpassed, the benchmarks of the US auto industry, including the Japanese transplants
operating there.
The Japanese challenge to the US automakers in their own market led the Big Three to alter
their corporate strategies with regard to entry-level front-wheel-drive small-engine passenger
cars. They sought out lower-cost production sites in a few select newly industrializing countries,
one of the most important of which was Mexico. In the Mexican case, strategic asset-seeking
and cost-reducing FDI replaced the former market-seeking FDI.
Another industry which similarly expanded rapidly was the electrical machinery and electronic
equipment industry, where the abundant supply of relatively high-quality, low-cost labour was
used by North American producers. The growth of Mexico's electric and electronic equipment
industry in the 1990s was largely export-led, mainly in the in-bond assembly scheme, and this
favoured the integration of this industry into the world economy, particularly the North American
one.
But unlike in the case of the Korean auto industry which progressively integrated national
suppliers, the Mexican case has resulted in the progressive demise of much of the existing
autoparts industry.
The Korean experience in the auto industry proved to be a much richer learning experience for
all involved, while the Mexican example does not penetrate the national industrialization process
to the same extent.

Immiseration

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The jury is still out," comments Mortimore, "[an] whether the Mexican example can be
considered one of immiserizing international competitiveness... The concept implies that an
economy gains international competitiveness but it does not serve to diminish the level of
misery which exists in national society."
"...The Mexican TNC-centric model has enabled many TNCs, especially US ones, to defend
their market shares in their home markets. However, national Mexican companies for the most
part are not major participants in the most dynamic industries of international trade. Rather they
operate in generally undynamic sectors such as cement, glass etc."
Commenting on the Mortimore study, and the contrast it draws between Mexico and the
Japanese and Korean experiences of industrialization, the editors of the volume, Richard KozulWright and Robert Rowthorn note that though Mortimore does not draw the parallel, his
comments about Mexico "echo the criticisms often voiced about Malaysia's even more
spectacular TNC-centric development."
Kozul-Wright and Rowthorn also note that the expanding scope of international production and
the accompanying role of TNCs have introduced new challenges and opportunities for domestic
firms, but there is no guarantee that the benefits will outweigh the costs or that market forces
will spontaneously generate the desired outcome.
For both economic and political reasons, small countries - industrial, developing or transitional are likely to be the most worried about the potential dangers of globalization, especially the rise
of TNCs against which they have little bargaining power.
"Indeed, the state remains a pivotal organization able to bring together social, political and
economic assets in such a way as to provide the vision and coordination needed to ensure the
growth and integration work in a mutually supportive way." (Third World Economics No. 191, 1631 August 1998)

Global Economy

https://en.wikipedia.org/wiki/World_economy

Political Economy

www.journals.uchicago.edu/toc/jpe/current

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References