Corporations Operating Beyond Economic Policy Regulations
An Article in the Compendium of Market-Based Social-Ecological Economics
Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?
Table of Contents
The contribution of transnational corporations to the international division of labor, to international technology transfers and global trade, and especially to economic growth, is considered by mainstream economists as being conducive to prosperity and welfare. How far-removed from reality this assessment is, can easily be evidenced by the social conditions that have spread around the globe as a result of years of economic deregulation policies. The latest evidence is provided by the financial and economic crisis which took its course in 2008 and was caused by transnational banks and related service businesses.
2. The Emergence of Transnational Corporations
The majority of transnational corporations have emerged from multinational companies which have determined the economic globalization from the beginning of the 20th Century to the 1980s. They were based on national parent companies who owned and operated foreign subsidiaries primarily in less developed countries where the subsidiaries were perceived, due to the long-term commitment of the parent companies, as quasi-local companies and brands. All major German companies have pursued this strategy over the past century.
With the deregulation of national markets and the ensuing transition to open global markets (the neoliberal globalization) the entrepreneurial strategies have gradually and decisively changed, starting in the 1980s of the 20th Century. The frontrunners of the neoliberal globalization gave up their static multinationality and internationality and replaced them by networks of globally distributed production facilities and branch offices. The remaining multinational companies were forced to follow this strategy in order not to be marginalized (see also the article Economic Globalization).
Ever since, the globally networked corporations intentionally operate on the transnational level that resulted from economic deregulation; that is, as far as possible beyond national and supranational regulations. But at the same time they make use of national resources, including specialized suppliers, whom they cross-link and coordinate for their global operations as well.
Over the past two decades, transnationality has become the standard practice of globally operating corporations. Their networking and mobility enables them to respond flexibly to changing regional developments and related market opportunities. The national identity of transnational corporations naturally has lost its significance under the new global economic conditions, so that corporate headquarters (formerly the parent companies), whose functions have been reduced to controlling the corporate networks, can be located at geographically arbitrary but economically suitable sites across the globe, just like the production facilities and branch offices . For this reason the networks are globally organized and globally oriented by nature, but still centrally coordinated and controlled.
3. The Constraints and Consequences of Transnationality
The driving force behind the transnationality of corporations is the actually natural and desirable pursuit of business expansion and profit, which has however become detached from economic policies and from its former location-dependent social and environmental commitments – all of this as an implication of the deregulation of national markets.
Thus, corporate strategies are aimed at
By only following their business objectives and operating in disregard of traditional economic structures, transnational corporations are directly responsible for the tendency towards complete territorial specialization and the subsequent disproportionate global division of labor, all of which took its course at the turn of the millennium. What appears to be an economically reasonable and efficient strategy from the perspective of the corporations proves to be nonsensical, inefficient and destructive at the macroeconomic level.
The thinking in terms of uniform global markets automatically leads to uniform mass-produced products and territorially specialized, cost-optimized mass production. Competing products become more and more similar over time, country-specific traditions and productions are suppressed, and the scope for differentiation, which is a crucial component of constructive competition and lasting progress, is severely narrowed. So the original variety of decentralized production gave, and still gives way to the uniformity of centralized mass production resulting in widespread economic desertification.
In other words, a worldwide structural de-industrialization takes place. Therefore, countries end up with purely export-oriented economic structures and are forced to pursue export-oriented strategies. Since all economic players try to follow the same strategy – with the protection mechanisms of calculated exchange rates, tariffs and trade quotas being eliminated in the course of the market deregulation – countries and corporations are faced with a destructive cut-throat competition being held on the basis of absolute price advantages in dollars, and increasingly in euros, thus providing for instant price comparisons, and promoting all conceivable methods of dumping. At the same time, all parties involved are subject to an extreme dependence on external (cross-border) events and shocks due to the elimination of market protection. The worldwide impact of the financial and economic crisis, which took its course in 2008, is well founded in this dependence.
Cost and Innovation Pressure
With the ongoing global convergence of technological capabilities aimed at mass production, the technological advantages become increasingly short-lived, so that players engaged in competition in open global markets have no choice but to follow the inevitable technological standard or, even better, outperform it and, in any case, achieve the decisive competitive edge over and over again via competitive prices in dollars or euros – with price dumping always being a systemic option.
Due to the rules of competition being narrowed to prices and technological standards, transnational corporations are exposed to an enormous cost and innovation pressure. And because the dollar or euro prices calculated under global competition are neither related to the actual costs and productivity levels of corporate production sites nor to the applicable exchange rates, the players come, as indicated above, under intense pressure to reduce costs and prices by means of dumping. They achieve this primarily by forcing the nation-states of their subsidiaries to make concessions on social, environmental, fiscal and other standards. Consumers in developed countries perceive these concessions at first in the form of seemingly favorable prices.
Product Life Cycle and Locational Competition
For the corporations the success in global markets is tied to a few, but decisive factors: first of all to high market shares which are a precondition to produce goods in large quantities and at low unit costs as well as to offer services with high transaction volumes and at low transaction costs. The achieved savings from high market shares and the corresponding mass production are referred to as economies of scale. The entrepreneurial dynamics under these conditions are primarily determined by product life cycles: the development of new products requires advanced physical (real) capital and highly qualified personnel, whereas the level of labor costs (mainly wages) is crucial for the market success of mature products. As a consequence, entrepreneurial activities, including the related physical capital and related jobs, are predominantly shifted from developed to less developed countries in the course of a product life cycle.
But relocations are also taking place between more or less equally developed countries. This is because corporations take advantage of their mobility in any case. Especially in view of the general fear of job losses they play nation-states off against one another when negotiating terms for their subsidiaries. This way an ongoing competition is created between countries for the establishment of industries – the so-called locational competition which is fueled by the above-mentioned coercion exercised by the corporations and the concessions subsequently granted by the nation-states, and which manifests itself in a downward spiral of the aforementioned standards. This development is at first providing consumers with seemingly low prices, but is soon hitting back at them in the form of declining wages and social standards.
In the longer term, corporate relocations entail losses for all parties involved. In addition to the dumping of standards they lead to a huge drain of physical and financial capital in the countries of origin and subsequently to job losses and reductions in tax revenue – finally causing public and private poverty. Whereas target countries experience different but equally destructive impacts: although investments are being made and specialized jobs created, these countries are overly influenced by foreign interests and industries not linked to their established structures and, even worse, misleading them to neglect their own independent development. In addition, target countries have to constantly fear that the transnational vagabonds move on to the next low-cost paradise.
Ireland, which was known as a tax haven for companies before the financial crisis began in 2008, has lived through an emotional roller coaster in the course of the real economic aftermath of the financial crisis and, ever since, is trying to regain its old attraction with its still relatively low corporate taxes – much to the anger of the other euro-zone countries.
Mergers, Acquisitions and Equity Investments
Since only market and cost leadership can permanently secure the future, corporations are forced to constantly expand (grow) at a globally competitive pace. Especially in mature, slow-growing and stagnant markets, expansion can only be achieved through mergers, acquisitions of competitors or, in a first step, through equity investments in take-over candidates. In any case cost savings will result more or less automatically when formerly independent organizations are merged, namely by closing down duplicate work and production processes.
The systemicly forced and individually obsessive pursuit of expansion explains why the economic power and the globally available production capital is being concentrated in fewer and fewer hands. This is a dangerous development that produces very stable oligopolies and partly monopolies, both on the supply and the procurement side, which are not be restricted under the prevailing conditions because existing antitrust laws do not prove effective under transnational constraints. In the final state, market diversity and competition are severely limited and corporations lose their innovativeness, neglect product quality and turn to monopolistic pricing aimed at high profits. The software giant Microsoft is the most outstanding example for this development.
Specialization plus Diversification
The trend towards complete territorial specialization does not stop with individual technologies and products. It continues with the advancing division of productions into individual processes, which are distributed among appropriate locations worldwide to form cross-linked value chains in view of lowest total costs. This last resort of specialization is responsible for the fact that approximately half of the global transport volume is caused by intra-corporate movement of intermediate products. Because pure specialization strategies are risky, there is a parallel trend towards diversification. The simultaneous striving for territorial specialization and entrepreneurial diversification under one roof explains why the proportion of conglomerates among transnational corporations grows and why their size increases more rapidly than a pure specialization trend would suggest.
Overcapacities and Value Destruction
Since the cost and innovation pressure is not bound to any social and environmental objectives, it reinforces itself continuously under the neoliberal conditions of unregulated competition in global markets. The necessity for productivity improvements or cost reductions comprises all industrial processes and causes global industrial overcapacities which in turn stimulate global competition and must be addressed by means of shorter life cycles of production facilities and products. These efforts are manifested in cyclical, highly capital-intensive innovation, rationalization and automation advances which occur in ever shorter intervals. Each cycle is accompanied by job losses and short-term depreciation, scrapping and replacement of physical investments such as production facilities, machinery and equipment.
The shortening of production and product life cycles causes a threefold destruction of value:
4. Competitive Disadvantages for SMEs
The cost and innovation pressure has a direct impact on local and regional providers, because a foreclosure between local/regional and global economic cycles is not possible in open global markets. Therefore, each and every price dumping by transnational corporations is directly affecting the competitive position of SMEs, primarily forcing them to cut jobs. Hence, consumers turn, less and less inhibited, to uniform global products – increasingly reinforced by their declining real income. In a high-wage country like Germany this means above all that the volume of cheap imports is growing larger at the expense of SMEs. As suppliers for transnational corporations, SMEs come under even heavier pressure when the corporations seek to enforce their cost targets by recklessly dictating prices.
5. The »Cost Management« of Transnational Corporations
The basic principle of neoliberal cost management is found in the combination of advanced production capital and know-how from developed countries with low-cost resources, low wages and low standards from developing and emerging countries. Through this global »pooling« of productive factors the corporations create a stable foundation for their »hegemonic pricing« which is characteristic for the neoliberal globalization, and is intended to irrevocably force competitors out of global markets and gain unchallengeable global market leadership.
The cost management continues with economies of scope and scale. Economies of scope result from the sheer size of corporate networks, especially as an outcome of mergers and acquisitions, when identical but geographically distributed functions such as human resources, administration or research and development are combined at a single site to save costs (whilst the usually expected synergetic effects are rarely being achieved). Economies of scale result from territorial specialization and mass production when unit costs are reduced due to increased production output at centralized locations. As a compliment see the article Scale Economies and Productivity.
In the course of the neoliberal globalization, the methods of transnational cost management have become more and more subtle:
Hedging of Foreign Exchange Risks
The chaotic, speculation-induced development of exchange rates within the neoliberal system forms part of a long list of discriminations faced by nationally based companies in domestic as well as external competition contrary to transnational corporations. The corporations can hedge against price risks in several ways. On the one hand, by spreading their value chains across several currency zones to achieve a »natural« compensation of currency-related price distortions. Incidentally, this kind of hedging contributes to secure the U.S. dollar’s prominent role as a quasi reserve currency of the neoliberal free trade. On the other hand, the corporations use their financial resources to hedge against risks of large individual transactions in foreign exchange markets by betting on unfavorable rate developments to automatically compensate losses if they occur.
Strategies for Tax Avoidance
In the policy-free transnational sphere corporations can spread their profits and losses across the globe by means of intra-group imports and exports of capital, production inputs and intermediate products such that their total tax liability is reduced to an unavoidable minimum. It is for this reason that intra-group flows of goods account for more than half of the world trade volume and its polluting transport volume.
There is, for example, the large furniture manufacturer who charges annual royalties to its German subsidiary for the use of its company name. The royalties are calculated to exactly consume the otherwise taxable profits of the subsidiary. Or the car manufacturer who obtains loans from a foreign subsidiary not only to transfer profits abroad – camouflaged as interest payments –, but in addition to have the payments deducted from its taxable profits at its headquarter location. And there are all the companies who selectively buy up insolvent enterprises just to offset their losses against their own returns.
All these corporate wheelings and dealings also affect the public sector – apart from the SMEs being subject to full domestic taxation –, causing decreasing tax revenues to a point where basic public services can no longer be provided to the extent necessary.
6. The Impact of Transnationality at a Glance
Under the prevailing conditions of the neoliberal economic doctrine the actually »natural« industrial pursuit of expansion and profit has become detached from economic policy regulations and economic governance, and has taken on a life of its own.
Industrial corporations, as representatives of the doctrine, are operating in a transnational sphere, determining the world’s economic and political development and fate:
7. Outlines of a Sustainable Corporate Landscape
Prospective outlines reveal themselves most easily when considering the principles violated by transnational activities as a first step. The list is alarmingly long, because obviously there is no single principle not being violated.
I confine myself here to the most important ones:
Subsidiarity, participation, democracy, solidarity, environmental protection, welfare, right to self-determination, participation and fair income in economic life (right to work and to secure a livelihood) as well as: free market economy.
Yes, the principle of free market economy is also undermined. Especially by transnational players who have gained absolute economic freedom and subdue all other stakeholders (suppliers, regional providers, workers and consumers) under their global economic strategies. At the same time they consider the free access to natural resources to be their »natural« right.
When applying these principles in an intellectually consistent way, a vision of a sustainable economic environment takes shape almost automatically. In view of the neoliberal process of concentration and centralization, the re-structuring of the economic landscape is obviously crucial for the establishment of a viable foundation. Contrary to the neoliberal de-industrialization, the economic value creation has therefore to be extended again to the entire geographical area. Value should be created wherever production is technologically feasible or opportunities can be created, that is, on the lowest possible level or, more concretely, distributed to as many geographical sites as possible. Given this vision, the foundation is laid for the application of the other principles:
Decentralized and especially subsidiary economic activities enable decentralized decisions (democratic participation), decentralization of responsibilities (solidarity, environmental protection and welfare) as well as decentralized diversity (economic participation and fair income). But subsidiarity also means that more demanding value added is generated at higher levels or, more concretely again, at a small number of central locations. That means, the subsidiary structure basically continues upwards and can, in agreement with other economic areas, be continued beyond national borders for sophisticated projects of international interest.
The technological options and constraints for production do not automatically ensure the formation of subsidiary structures, as one can imagine. As already mentioned, this is so because the actually natural and desirable entrepreneurial quest for expansion and profit tends towards continued concentration of production capital and economic power. It is for this reason that specific, autonomous economic policy countermeasures are required to enforce the sustainable principles.
In short, it requires a constant process of enforcing subsidiary structures upon the corporate landscape, a process of »subsidiarization« as the primary task of autonomous economic policies. This task is best achieved by progressively taxing companies according to the increasing social and environmental costs incurred in the process of their (unjustified) growth in size.
The effective building of subsidiary economic structures under the conditions of the neoliberal globalization as a base for a post-neoliberal economic order is addressed in the article Building Subsidiary Economic Structures.
Click here for the German-language version: Transnationale Konzerne.