The Politics of Multinational Corporations PLUS independence, democracy, & development 

1. The Politics of Multinational CorporationsPLUS independence, democracy, & development  READING ASSIGNMENT: Oatley – Chapter 9

2. Plan: • Accountability of MNCs • Independence movements • Obsolescing bargain • Where does FDI go? (RTB v. Democracy) • Democracy & Development • Development?

3. Part 1: Accountability • To whom are governments “accountable”? • Depends on political institutions • Veto players may be elected by various jurisdictions • Dictatorships may depend on the support of a small loyal clique (military, business elites) • To whom are MNCs accountable? • Stockholders

4. Democracy vs. Dictatorship

5. Hazard Rate over Time for Democracies (Solid Line) & Dictatorships (Dotted Line) – Time in years

6. MNCs: Accountable to stockholdersAre MNC effects good or bad? • They generate positive externalities • Educate the workforce • Managerial experience • Access to marketing networks • Transfer technology • Allow countries to draw on the savings around the world (rather than rely just on local savings for investment) • Sometimes they draw on local savings! • “crowds out” investment in local firms • Profits may be repatriated! • May force the local affiliates to work only with the parent company • paying licensing fees • purchasing inputs from other subsidiaries of the same corporation • May drive local firms out of business

7. Oatley p182 • Newly independent governments wanted to establish their political & economic autonomy from former colonial powers  • took control of existing foreign investments and managed the terms of new investments • Nationalize / expropriate

8. Part 2: Independence movements

9. Hechter – the political economy of independence movements • Argues that the emergence of nationalism in the 19th century follows from a shift in governance during the late 18th century. • Traditional states governed by indirect rule, which allowed for self-determination. • Ancient empires lacked the technology to impose direct rule. • More recent empires ruled directly and extracted greater resources through taxation. • Hechter argues that direct rule causes cultural distinctions to become important determinants of an individual’s life prospects. • Secondly, direct rule diverts resources away from local elites to the center government. Local elites have an incentive to organize nationalist movements because they will be the direct beneficiaries of eliminating the central government. • Denial of local elite autonomy connects modernity to nationalism.

10. Puerto Rico • Del Moral (2006) describes how Puerto Rican school teachers resisted Americanization through the US colonial educational policy in the early twentieth century • Hechter-esque explanation? • Local elites wanted to retain power • US special commonwealth-arrangement with PR weakens the nationalist movement

11. Back to MNCs • MNCs: Excluded from ownership of many industries in many developing countries • Nationalization (expropriation) – served both economic and political objectives • See p183 fig 9.1 – acts of expropriations

12. Obsolescing bargain • The MNC cannot easily remove its fixed investment from the country, so the investment becomes a hostage • What analytical tool does this recall? • Commitment problem • Credible commitment problem • Time-inconsistent preference problem • Time-consistency problem • By the way, Happy Valentine’s Day!!!

13. So, how can a country attract FDI? • One story: • “RTB”

14. “Race to the bottom” thesis (RTB) • FDI goes wherever taxes are lowest • 2 problems with this story: • On one hand: MNCs benefit from public services So maybe MNCs tolerate some taxation • On the other hand: Low taxes are not credible Even if MNCs don’t like taxes, they shouldn’t trust governments How can governments “tie their hands”? Jensen’s answer: Democracy More on this next class!

16. Why do some countries have democracy and others do not? • The Question of Democracy & Development

17. Puzzle time • Explain the correlation between development (per cap income) and democracy.

18. HINTS • Development does NOT cause democracy to emerge. • Democracy does NOT cause development. • The correlation is NOT spurious. • (There is a causal connection.)

19. Regime transition is a dynamic process • High per capita income has little to do with why democracies emerge. • Democracy is more likely to survive at high levels of per capita income. • EXPLAIN THOUGHT EXPERIMENT • http://freedom.indiemaps.com/ • What region do we get wrong? • Middle East • Is it culture? Or something else? • More on this next time

22. Economic Development • So, given the connection between democracy & development, • Where does development come from?

23. Jared Diamond’s Guns Germs and Steel • Culturist stories – tend to be ad-hoc (if not simply racist…) • “Protestant work ethic” • If another culture had succeeded we could find some other quality… • Diamond begins with the assumption that all societies began with the same distribution of “talent” • Some societies had better “material” to work with • And some societies were better positioned to learn from neighbors. (Diffusion was geography-dependent) • Reductionist story • Boils human history down to available plants and animals, latitude, and orientation of landmass.

24. Time-line

25. Story in a nutshell: • Advances made by: • Original discovery (rare) • Learning from neighbors. • Original discovery (by accident) • A function of region’s biological endowments. • Learning • A function of geography

27. The Eurasian landmass was the best suited for the transfer of information. • South America perhaps the worst suited. • Northern Africa was better off than Africa South of the Sahara. • Many agricultural inventions can travel 1000s of miles along the same latitudinal range. • Cannot travel more than 100s of miles along the same longitudinal range.

28. Languages, writing, etc… • Sedentary lifestyle necessary. • Elites necessary • Only becomes possible when food is stored. • Most societies borrowed / learned from neighbors. • Helpful to have other neighbors with sedentary lifestyle and elites. • Again – think of how luck is shaped by your endowments. • Much less likely to learn writing if none of your neighbors have…

29. Lethal gift of livestock: • Disease! • Bad in the short-run. • Great for the long-run resistance of populations to diseases. • Think of Europeans vs. Americans in 1500.

30. The China Question • Or… why did Europe pass Asia when it comes to development? • Answer of Jared Diamond &, later, Douglas Hibbs: • Political institutions • Competition in rugged European terrain led to competing political systems • Democracy emerged… • My answer: • This theory covers 10,000 years of human history. The last 500 years of European dominance is a blip • Give Asia 50 more years and let’s see if it’s still an anomaly to the theory • As for why the blip?...

31. Atlantic Ocean Total area of about 106.4 million square kilometers Covers about 20% of the Earth's surface About 60% the size of the Pacific Ocean Pacific Ocean The largest of the Earth's oceanic divisions 169.2 million square kilometers Covers about 32% of the Earth’s surface Larger than all of the Earth's land area combined Luck of the draw

32. Take homes • MNCs are accountable to stockholders (1 dollar 1 vote) • Governments are “accountable” to various constituencies depending on the political institutional context • Newly independent countries were resistant to FDI • Hechter's story of independence: nationalism mobilized by local elites who are disenfranchised (lack taxation powers) • Obsolescing bargain - another example of a time-consistency problem • Race to the bottom thesis • Democracy & development: democracy survives at high income • Diamond's story of development: advances through learning are more likely across latitude than longitude

33. Thank youWE ARE GLOBAL GEORGETOWN!