Understanding International Relations, Third Edition

The new global economy
The theories of international political economy presented above – with the
exception of some variants of Marxism – mostly share certain core assump-
tions; that the state encompasses a national economy, that international
economic activity took place between such national economies, that inter-
national trade took place between national firms, and that the primary
function of international financial transactions was to facilitate trade. Each
of these assumptions is now under threat.
The most important of these changes is the rise in significance of the
international business enterprise, or MNC (‘multinational’ is something of
a misnomer because many of the firms in question are mono-national in
ownership and management, but the use of MNC as a generic term here is
so widespread that it would be pedantic to try to replace it). Since MNCs
are regarded by many as the root of all international evil, it is important to
keep a sense of proportion when examining their influence. The first step is
to make it clear that there are many different kinds of business enterprise
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that are multinational; their common defining feature is that they all
operate across national boundaries and are based on direct foreign
investment – the ownership and control of assets located abroad – as
opposed to indirect or portfolio investment in which assets are purchased
for the financial return, rather than the control, they bring, and as opposed
to simply trading across frontiers.
Some MNCs are engaged in the extraction of raw materials; this is an
activity whose location is determined by the accidents of geography and
geology. Copper companies go where the copper is, oil companies where the
oil is and so on – which means that these corporations do not usually have
relocation as an easy business strategy, which, in turn, means they have an
incentive to try to preserve good relations with local political elites.
Unsurprisingly some of the most egregious acts of political interference by
MNCs have involved such corporations. Other corporations engage in
manufacturing, generally in the markets for which they are producing; that
is, in the industrialized world. Here direct political influence is compara-
tively unusual, although indirect influence is very great. Some MNCs have
world-wide integrated production strategies, although the extent of this
phenomenon is contestable. A third important category of MNC is made up
of those corporations who engage in the global manipulation of symbols –
the great multi-media and entertainment corporations, but also interna-
tional banks – whose activities are highly deterritorialized, although, for the
time being at least, their chief executives are still unable to avoid locating in
one state or another, thus retaining a territorial link. Finally, for the sake of
completion, mention should be made of international holding companies,
where different firms producing different products in different countries are
owned by the same corporation but where there is no attempt to produce a
common business strategy; such holding companies may have little political
significance by comparison with the other types of MNC.
While there are sharply contrasting views of the significance of these
corporations, there are a few points that are accepted by all. First, there are
a great many more MNCs operating in the world today than there were in
the 1960s and 1970s, and many of these new corporations are engaged in
‘cutting edge’ economic activities, in the production of high-technology
manufactures, or in global finance or information and entertainment rather
than in the extractive industries or old-style ‘metal-bashing’. Second, and
largely because of the nature of these activities, these newer corporations
carry out most of their activities in the advanced industrial world and the
‘Newly Industrializing Countries’ (NICs) rather than in the less developed
countries generally or the least developed countries in particular. Third,
whereas up to the 1960s nearly all large MNCs were based on American
capital held abroad, the situation today is rather different; the United States
is still the country with the largest individual stock of overseas capital, but
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in recent years the net flow of capital has been to the United States from
Europe and Japan, and the total stock of American capital held by foreigners
is larger than that of foreign capital held by Americans.
To reiterate, the point about the emergence of the MNC is that many of
the assumptions that have guided past thinking now have to be abandoned.
Today, a high proportion of international trade is ‘intrafirm’ trade, that is
between different branches of the same corporation, although just how high
a proportion is difficult to say because of the weakness of official statistics;
it is probably between a quarter and a third by value of the trade of the
advanced industrial countries. The possibilities for manipulating markets
opened up by this phenomenon are tremendous; in principle, via ‘transfer
pricing’, firms can move profits and losses from one area of operation to
another at will, with a devastating effect on the effectiveness of national
tariff and taxation policies and on international attempts to regulate trade.
Transfer pricing is an activity open only to MNCs – and, in practice, more
easily controlled by tax authorities than this summary would suggest – but
in other respects too much emphasis on MNCs as such can be misleading.
Effectively all large corporations today are behaviourally ‘multinational’ –
that is to say, to some extent they think and plan globally even if they do not
possess foreign assets. The old distinction between multinationals and
others relied on a national compartmentalization of economic activity to
which MNCs were an exception, a situation that no longer applies. The
new technologies upon which production today is based work against any
such compartmentalization.
The same point can be made with respect to a change in some ways more
radical in its implications than the rise of MNCs – the emergence of global
financial markets. One of the reasons for the collapse of the IMF’s
exchange-rate regime in the 1960s and 1970s was the existence of the
‘Eurodollar’ market. Once it was determined at Bretton Woods that private
movements of capital would be allowed, and once the City of London was
allowed to return to its traditional role with the ending of controls in 1951,
the emergence of new capital markets was inevitable. ‘Eurodollars’ were
foreign currencies held in banks beyond the regulatory reach of the country
that issued them – the generic title derives from the fact that these were
originally US dollars held in European (mainly British) banks. A market in
Eurodollars existed alongside domestic capital markets; originally on quite
a small scale and initially established for political reasons, it grew very
quickly, largely because various features of US banking regulations encour-
aged US MNCs to keep working balances abroad. By the mid-1960s the
‘Eurodollar slop’ of currencies being moved from one market to another
was a major destabilizing factor in the management of exchange rates.
The Eurodollar market still exists, but under different conditions.
Whereas in the 1960s this was a market that was separate from, albeit
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linked to, domestic capital markets, nowadays all currency holdings are
potentially ‘Euro’ holdings; with the end of regulation in most countries,
national capital markets and national stock exchanges are simply local
manifestations of a world-wide market and the creation of credit is beyond
the control of national authorities. Trading takes place on a 24-hour basis,
following the sun from Tokyo to Hong Kong to Frankfurt and London to
New York and back to Tokyo. Some transactions in this market are clearly
‘international’ – foreign currency loans, the purchase of Eurobonds, and so
on – whereas others are ‘local’, but the compartmentalization that once
kept such activities apart and made of the former a limited specialization no
longer exists. Just as the distinction between multinational and national
corporations is no longer of great interest, so the distinction between
international and national capital markets is now somewhat unreal. In the
aftermath of the rush to create new financial instruments in the 1980s,
virtually any economic or financial activity can be ‘securitized’ and traded
internationally. Thus it is possible to buy assets whose value is calculated on
the basis of the cash flow generated by the repayments of loans for the
purchase of automobiles in the US, and foreign bankers can exchange dollar
debts for shares in Brazilian soccer teams.