Marxist Perspective and MNCs PDF

The Marxist Perspective and MNCs 1 Basic tenets of the Marxist perspective. 1. The State is the most important actor in the system. 2. The State acts rationally to maximize self-interest. 3. The State is nothing more than an agent acting at the behest of the dominant class- in capitalism, the bourgeoise = The relationship among classes is the main factor affecting the economic and political order. 4. The international system is hierarchical. 2 The relationship between politics and economics Marx viewed politics as being subordinate to economics a. formal government institutions respond in a rather passive manner to socioeconomic pressures b. a state’s policies reflect the interests of the capitalist class. The nature and purpose of international economic relations Marxists view economic relations as being basically conflictual and zero-sum in nature 3 Dependency and Economic Development North-South Relations 4 The future of Less-Developed Countries (LDCs) is one of the most pressing issues of IPE in our days, and the resolution of this issue will profoundly affect the future of the planet: 1. Some argue that the operation of the world economy and the practices of capitalism are detrimental to the interests of the LDCs 2. Others believe that the problem lies with economic factors or with misguided policies of the LDCs themselves. => Decisions on whether integration in or dissociation from the world economy is the route to economic development are dependent on beliefs about the causes of the situation. Note: The most prominent theories explaining development are those of economic liberalism and the under-development position (structuralist and dependency positions) 5 The Liberal position According to economic liberals 1. the world economy is a beneficial factor in economic development = an interdependent world economy based on free trade, specialization, and an international division of labor facilitates domestic development  flows of goods, capital and technology increase optimum efficiency in resource allocation and transmit growth from the developed nations to the LDCs. 2. the key to economic development is the capacity of the economy to transform itself in response to changing conditions = the failure of many LDCs to adjust to changing prices and economic opportunities is rooted in their social and political systems => the basic obstacles to economic development are to be found within the LDCs themselves (ie, domestic market imperfections, 6 economic inefficiencies and social rigidities) The Underdevelopment position 2 strands (structuralist and dependency): places the responsibility for the worsening position of the LDCs on the external world economy and not on the LDCs themselves Major tenet: the world is hierarchically organized, with the leading capitalist states in the core of the global economy (advanced industrial countries) dominating and exploiting poor states in the periphery (less-developed countries) = only the core states can make autonomous choices about domestic and foreign policies, and market mechanisms simply reinforce socioeconomic and political inequalities = economic structures favor the developed countries  The nature of the system is detrimental to the interests of the poorer countries: International agreements on climate change would protect and advance the interests of capital (developed countries) =tensions between North and South + some agreements 7 between elites of North and South. The Structuralist position A liberal capitalist world economy preserves or increases inequalities between developed and less developed economies as the developed countries tend to benefit disproportionately from international trade The terms of trade: the value of exported goods relative to imported goods on which developing countries depend have deteriorated steadily a. the amount of a given raw material they must export to get a manufactured product in return keeps growing. b. the prices of raw materials and commodities fluctuate in a notorious fashion. Structuralists have been very pessimistic that the LDCs could reverse their situation though expansion of their exports 8 Policies advocated by structuralists to deal with these problems 1. the creation of international organizations like UNCTAD to promote the interests of the LDCs, especially the exporting of manufactured goods to developed countries 2. the enactment of international policies and regulations, such as a commodity stabilization program that would protect the export earnings of LDCs 3. rapid industrialization to overcome the periphery’s declining terms of trade and absorb its labor surplus 4. the pursue of an “import-substitution” strategy through policies of economic protectionism, encouragement of foreign investment in manufacturing and the creation of common markets among the less developed economies themselves 9 The Dependency Position Dependency theory is closely related to the concept of the Modern World System (MWS) whose most important feature is that, functioning as integrated whole, extracts economic surplus and transfers wealth from the dependent periphery to imperial centers. => Dependency theorists see underdevelopment as a process in which the LDCs are caught because of the inherent relationship between developed (capitalist) and underdeveloped nations. The major components of dependency theory 1. The nature and dynamics of the capitalist world system = Dependency theory takes as given that there is a hierarchical structure of domination between the core and the periphery based on economic neocolonialism and informal control. 10 2. The relationship between the advanced capitalist to less developed economies can bee placed into 3 categories a. Exploitation: the Third World is poor because it has been systematically exploited. b. Imperial neglect: the problem of the LDCs is that the forces of capitalist imperialism have deliberately bypassed them (marginalization). c. Dependent or associated development: although dependency relations under certain conditions can lead to rapid economic growth (see South Korea, Taiwan) but this type of growth is not true development because it does not lead to national independence. 3. Dependent countries are fastened to the world economy by a transnational class linkage =an alliance of convenience and common interest exists between the centers of international capitalism and the clientele class (national bourgeois elites) who pursue the interests of their own class rather than that of their country 11 Solutions to underdevelopment advocated by dependency theorists a. Destruction of the linkage between international capitalism and the domestic economy through the political triumph of a revolutionary national leadership that will overthrow the clientele elite and replace it with one dedicated to autonomous development b. Implementation of autonomous and self-reliance strategies. 12 Marxism and climate change Climate change arrangements reflect the interest of the capitalist, industrialized countries 1. capital determines the international rules of climate change 2. North imposes its preferences on South 3. capitalists dominate the Global Environmental Facility 4. capitalists present climate change as problem of the South. 13 But 1. capitalists’ interests have not always reflected in agreements 2. capitalists’ interests do not always consolidate = united view doesn’t exist (coal vs renewable energy; oil vs natural gas) 3. South’s views are incorporated in agreements 4. South is not a coherent unit 5. negotiating coalitions cut across North-South divide (US + Oil producing countries vs EU + AOSIS) 14 International justice and climate change Who pays? Intragenerational justice (within existing generations) affect the bargains states can make and the power relations between them a. Redistributive justice: those who cause the problem have the responsibility to make amends for it (“differentiation” of commitments) 1. “Polluter pays” = close fit between concerns of justice and economic efficiency (Kyoto Protocol: carbon taxes, tradable permit system) 2. “Who compensates?” = is based on the responsibility-based principle (FCCC and Kyoto: developed country Parties assist the developing country Parties = not entirely clear about it) 15 b. Distributive justice: distribute costs (benefits) among interdependent parties => equity concerns => an equal per capita emissions reductions But in climate change, the allocation of emissions over the longer term give rise to conflicts between i. developed and developing countries (costs associated with distribution of emissions reductions, and financial resources and technology transfers) ii. among developed countries => A mixture of the egalitarian with the “comparable burdens” solution = move from existing distribution toward an egalitarian one 16 Intergenerational justice (normative argument): impacts of climate change will be felt by future generations => present generations have major obligations to future generations => create institutions and rules that would involve a. Conservation option = conserving the diversity of the natural and cultural resource base) b. Conservation of quality (leaving the planet no worse off than received) c. Conservation of access (equitable access to the use and the benefits of the legacy) => could lead to global action to forcefully reduce CO2 emissions and to creation of insurance fund to compensate victims of climate change 17 Multinational Corporations (MNCs) 18 The Multinational Corporation (MNC) is probably the most important type of non-state actor to emerge in the last 2 or 3 decades. The MNCs 1. produce and distribute goods and services across national boundaries 2. spread ideas, tastes, and technology throughout the world 3. plan their operations on a global scale Definition: MNCs are firms that control productive assets in more than one country =>MNCs acquire their foreign assets by investing in affiliate or subsidiary firms in host countries = foreign direct investment (FDI) (management rights and control) 6 industrial countries accounted for about 75% of the total FDI in the early 1990s -USA, Britain, Germany, France, Japan, and the 19 Netherlands. What do the grand theories predict with regard to the impact of MNCs on politics and redistribution? Liberals: the mobility of MNCs gives them a major advantage over national governments and local firms, which are bound to specific territories. -> MNCs have become “the major weavers of the world economy. FDI contributes to increased efficiency in the use of the world’s resources by stimulating innovation, competition, economic growth, and employment. MNCs provide countries with numerous benefits, such as capital, technology, managerial skills, and marketing networks In sum: MNCs welfare-enhancing 20 Marxists: corporate managers constitute a transnational class. This class maintains and defends the capitalist system. Managers of major corporations have a predominant influence over the conduct of the foreign policy of their respective home country. MNCs are predatory monopolists that overcharge for their goods and services; limit the flow of technology; create dependency relationships with host countries in the third world; pollution havens; cause or at least delay development. MNCs are likely to have a negative impact on home countries by exporting jobs and imposing downward pressures on labor and on environmental standards. 21 Theoretical Considerations on MNCs 22 Theoretical Considerations on MNCs 23 Realists: the power of states over multinationals did not decrease. MNCs retain close ties with their home governments. Hence, MNCs would not have been able to expand their activities without the support of the most powerful states and/or their home countries. => MNCs as a means to maintain/increase economic power and thereby security 24 Organizational types of MNCs 1. Vertically integrated MNC: produces goods and services at different stages of the production process = the outputs of some affiliates serve as inputs to other affiliates of the MNC  Avoid uncertainty and reduce transaction costs; limit competition.. Example: in petroleum, they are often involved in the extraction and distributive stages i.e., owning many petrol stations. 2. Horizontally integrated MNC: extends its operations abroad by producing the same product or product line in its affiliates in different countries = has the same sort of plant in many countries  Defend and increase their market shares; “get behind” external barriers imposed by national governments Example: Union Carbide which has many chemical subsidiaries around the globe. 3. Conglomerate firms: have interests in many sectors = Ownership or control by one firm of two or more completely unrelated businesses, such as an auto dealership and a restaurant. 25 Organizational types of MNCs (cont.) 4. Joint ventures: MNCs gain entry into a foreign country only by agreeing to form joint ventures with local firms = the various partners own less than 100% of the equity of the joint venture firm Example: automobile industry, telecommunications equipment and aircraft 5. Strategic alliances: are partnerships between separate, sometimes competing companies = they are drawn together because each needs the complementary technology, skills or facilities of the other; but the scope of the relationship is strictly defined, leaving the companies free to compete outside the relationship Examples: Airline alliances 26 What Explains the Rapid Growth in MNC Activity? 1. Changes in Technology and Organizational Sophistication New communication technologies, cheaper and more reliable transportation networks, and innovative techniques of management as well as organization. 2. Government Policies Progressive elimination of restraints on capital flows = leading to expansion of direct investment Reduction of tariffs made direct investment more attractive Governments directly subsidized FDI outflows by providing various forms of insurance for international investment 27 What Explains the Rapid Growth in MNC Activity? (cont.) 3. Product Cycle Theory According to Raymond Vernon, every product evolves through three phases in its life history: - the introductory or innovative phase: production is located in most advanced industrial country. - the maturing or process-development phase: production shifts to other advanced countries. - the standardized or mature phase: production shifts to LDCs, whose comparative advantage is, for example, their lower wage rate. From these export platforms, either the product itself or component parts are shipped toward markets. Highest validity for FDI in manufacturing, the early overseas expansion of US corporations, and to “horizontally integrated” investment. 28 What Explains the Rapid Growth in MNC Activity? (cont.) 4. Internalization Theory (Transaction Costs) Market imperfections − Costs of information − Contract enforcement problems − Information asymmetries between buyers and sellers Firms expand abroad to “internalize” transaction costs because costs of concluding long-term contract with external firm higher than costs of establishing own subsidiary Locational advantages (OLI argument) − Firm must have market power based on ownership of specialized knowledge − Must consider foreign location advantageous for new investments relative to alternative locations − Must prefer FDI over exporting and licensing by usual 29 internalization logic What Explains the Rapid Growth in MNC Activity? (cont.) 5. Oligopoly Theory Firms move abroad to exploit monopoly power (unique products, marketing expertise, control of technology and managerial skills, access to capital) FDI as part of competitive strategy: − to gain a permanent advantage over their competitors − to block opponent’s move and prevent competitor from gaining a survival-threatening advantage Oligopoly theory rests on strategic interaction − timing of entry into specific markets depends upon timing of entry of a given firm’s competitor(s) 30 What Explains the Rapid Growth in MNC Activity? (cont.) 6. The Tariff-Jumping Hypothesis MNCs want to maximize profits Tariffs reduce profits MNCs can avoid tariffs (or non-tariff barriers) by establishing foreign subsidiaries Empirical focus: Willingness of MNCs in Japan and US to invest in Ireland and UK because want to enter EU market 31 What Explains the Rapid Growth in MNC Activity? (cont.) 7. Obsolescing Bargain Theory Idea: Bargaining situation between firms and governments Power determines bargaining outcome Hold-up problem Power shifts from firms to governments in the process of FDI − Prior to investment: Firms have stronger bargaining position because of firm-specific advantages such as superior technology, access to capital markets, and access to final product markets − After investment: bargaining advantage shifts toward host country because MNC has made fixed investment -> government wants to renegotiate (expropriation risk) Most plausible in case of natural-resource industries (involve large fixed investments) 32 The Relationship of MNCs and their Home Governments and Society ▪ Governments: Generally, the policies of home countries toward their respective MNCs have been favorable, but they are also marked by ambivalence. − Home governments often give their MNCs favorable treatment and protect them from hostile actions of foreigners (and foreign countries) − Sometimes MNCs viewed as part of foreign policy toolbox. ▪ Societies: Labor groups are unconvinced about the beneficial effects of MNCs − The mobility of capital and MNCs put immobile workers at a distinct disadvantage. − The transfer of MNC activities to affiliates in LDCs with lower wages and standards produces a deterioration of working conditions in the home country. − This also induces de-industrialization. 33 Effects of FDI in host countries: Economic effects Positive effects: MNCs fill resource gaps in developing countries and improve the quality of production factors - Facilitates: − capital accumulation − technological transfer − job creation − trade flows Negative effects: − Technological dependence − Wage pressure (capital mobile, labor immobile) − Avoiding taxes via transboundary shift of losses − Payment of excessive costs for imported technology − No improvement in labor/management skills − Oligopolistic character of MNCs threatens existing domestic firms − Pressure and threats from home countries − Increased lobbying activities in host country 34 Effects of FDI in host countries: Political effects Evidence suggests that MNCs may have intervened in political processes in their host states in the third world by taking actions which are: − legal (e.g., contribution to political parties, lobbying with local elites, carrying out public relations campaigns) − illegal (illegal contributions to political parties, bribe to local officials, refusals to comply with host laws and regulations) actions within host states. MNCs most likely pursue political stability rather than a particular form of government. 35 MNCs (oil) and climate change ▪ MNCs strategies towards the climate change issue 1. Diverge because of home country (institutional, economic, regulatory, cultural) environments and individual firm’s history experience with renewable sources of energy 2. Converge because of a common industry-level field and the emergence of climate change as a global issue ▪ Examine the strategies of 4 oil MNCs (2 US: Exxon and Texaco; 2 EU: BP and Shell) => Divergent local context influence initial corporate reactions and convergent pressures dominate as the issue matures 36 MNCs and regimes ▪ MNCs would favor market enabling regimes at the international level (WTO, OECD, etc.) and prefer to keep social or environmental regulation under national or private authority. ▪ However, in a globalizing world with an increase in the power of civil society groups to influence policy making the dyadic bargaining between states and MNCs has developed into multiparty bargaining among NGOs, MNCs, and governments. ▪ Consequently, most regimes have regulatory and market enabling elements reflecting: a) the interest of diverse actors b) the bargaining (relative) power of those actors c) the dynamic nature of the bargaining process (most powerful actors do not always win) 37 6 Principles of Justice in the Context of Global Climate Change Matthew Paterson Concerns for equity, or distributive justice, are widely recognized by ob- servers and participants in international climate negotiations as central to effective responses to climate change. There is, however, no wide- spread agreement on what this crucial principle means. This and the fol- lowing chapter outline the main positions with regard to this question and how they have translated into concrete proposals in the climate ne- gotiations. This chapter outlines principles of international justice in general in relation to climate change, while the following chapter looks at more concrete proposals concerning the application of equity in climate negotiations. Political theorists and philosophers have developed a rich and varied set of arguments concerning justice. Their concerns are to find the most persuasive foundation for normative claims concerning particular po- licy projects or outcomes. Analysis of justice by political philosophers is based not in a description of how different individuals or groups con- ceive of justice, nor in descriptions of their personal preferences, but in specifically normative arguments concerning the contents of justice. Rather than conceive justice as cultural discourse, it is considered here as deriving from rational argument. Thus, justice does not arise from individual preferences, it evolves from a considered, rational debate in which those preferences themselves become part of what needs to be ne- gotiated. This chapter draws mostly on this perspective of justice. After outlining the various types of justice, it will provide an overview of the challenge of intergenerational justice before turning to the implications of justice in the case of global climate change. 120 Matthew Paterson 1 Content of Justice In a series of works on this question, Shue poses four questions that pro- vide the most useful framework for discussing the subject (Shue 1992; 1993, 51; 1994, 344; 1996): 1. What is a fair allocation of the costs of preventing the global warming that is still avoidable? 2. What is a fair allocation of the costs of coping with the social consequences of the global warming that will not, in fact, be avoided? 3. What background allocation of wealth would allow international bargaining (about issues, like 1 and 2) to be a fair process? 4. What is a fair allocation of emissions of greenhouse gases (over the long-term and during the transition to the long-term allocation)? (Shue 1994, 344). Various perspectives can be brought to bear on these questions. Within the literature on international agreements on climate change, Grubb et al. give the most comprehensive list. These perspectives include: 1. “Polluter pays” rationales, based either on current emissions or historically accumulated contributions to global warming. 2. Equal entitlements approach (all individuals have an equal right to use the atmospheric commons). 3. “Willingness-to-pay” justification (derived from welfare economics). 4. Each participant should shoulder a “comparable” burden. 5. Recognition of distributional implications of any agreement (a position draw- ing explicitly on Rawls (1973). 6. Preservation of the status quo (present emitters have established some com- mon law right to use the atmosphere as they presently do). 7. “Reasonable” emissions compatible with (a fairly generous interpretation of) basic needs (paraphrased from Grubb et al. 1992, 312–314). Within the more general literature on justice in international relations, six approaches to justice are often identified. 1. A rights-based approach, which suggests we have rights to a stable climate. 2. An approach based on responsibility: those causing a problem have a responsi- bility to resolve it (Brown 1992, 159–162). 3. A utilitarian position: we should act to maximize overall human welfare, which most commonly will involve transferring resources from rich to poor (e.g., Singer 1972). 4. The Kantian categorical imperative, and developed with regard to interna- tional justice by Onora O’Neill (1986, 1991): justice requires that we act on prin- ciples that can be universally applicable, such as not endangering the global climate system. Principles of Justice and Global Climate Change 121 5. A Rawlsian position (related to the previous one), which specifically suggests that the distributional effects of social institutions should benefit the worst off. 6. The approach of Brian Barry (1989b): agreements should be negotiated not under a Rawlsian veil of ignorance, but in order to reach agreements that none could reasonably reject. This integrates notions of power and of intersubjectivity into the question of justice.1 Within these various approaches, two different conceptions of justice should be distinguished. On the one hand, retributive justice entails that those who cause a problem have the responsibility to make amends for it; this is the principle of justice underlying the criminal justice systems. This is largely undisputed as an ethical principle, but in the climate change context it becomes complicated by the empirical debates concerning re- sponsibility for causing climate change. It does underlie, however, various proposals that have emerged in climate negotiations—including those for “differentiation” of commitments (see below) or at its most basic, the recognition that developing countries do not have any obligation to re- duce CO 2 emissions under the FCCC at this time. On the other hand, principles of distributive justice underlie any scheme that involves distributing costs (or benefits) among interdepen- dent parties. Most of the principles of justice outlined above concern this point of view. Within the philosophical debates, the last three approaches in the preceding list are commonly regarded as the most persuasive (the second, of course, refers to retributive justice). Rights-based approaches are often regarded as difficult to apply, especially concerning complex phenomena such as international justice, since it is often impossible to derive obligations on or prescriptions for specific institutions from partic- ular rights (e.g., O’Neill 1991). In the case of climate change, the right to a stable climate does not translate easily into specific obligations for individuals, states, or other institutions. Utilitarianism is also regarded as ethically problematic. In particular, it undervalues the specificity of individual (and collective) identities by ignoring questions of basic rights, and by treating individual preferences as inviolable. 2 Intergenerational Justice The discussion so far has focused on justice within generations. However, intergenerational justice is also normatively important, since many of the 122 Matthew Paterson likely impacts of climate change will be felt by people in future genera- tions to a larger degree than by current generations. As a consequence, most writers on this subject suggest that present generations also have major obligations to future generations (see, e.g., Barry 1989a; Brown Weiss 1989). The argument used is a Rawlsian one, since we should con- sider, for example, under the Rawlsian “veil of ignorance” the future effects of actions by present generations. Given this, we would create institutions and rules that would involve conservation of options (con- serving the diversity of the natural and cultural resource base), conserva- tion of quality (leaving the planet no worse off than received), and conservation of access (equitable access to the use and benefits of the legacy) (Brown Weiss 1989, 320). Little attention was paid to intergenerational justice as compared to intragenerational justice within the negotiations. This is largely because questions of justice within existing generations clearly affect the bargains states can make and the power relations between them, as emphasized by Paterson (1992) and Young (1994b, 48–50). However, intergenerational equity can primarily operate as a normative argument that, if taken seri- ously, would make arguments for aggressive global action to reduce greenhouse gas emissions much more forceful (Grubb 1995, 464) and might possibly lead to the creation of an insurance fund to compensate victims of global climate change impacts (see below, and for a general discussion, see Page 1999). 3 Implications of Justice The implications of retributive justice are fairly clear, and represent an important strand in policy debates on climate change. The implications are twofold. First, it is reflected in the “polluter pays” principle. In climate negotiations, this has come through in proposals both for carbon taxes, and more specifically in an international context, tradable permit systems. At Kyoto in 1997, negotiators agreed to adopt such a system, although its specific form is still being developed. In this context, there is (at least superficially) a close fit between concerns of justice and concerns of eco- nomic efficiency. Similarly, such joint concerns underlie proposals for dif- ferentiation of commitments. Principles of Justice and Global Climate Change 123 Second, retributive justice raises questions of compensation. It follows from the responsibility-based principle and relates to Shue’s first question. The Alliance of Small Island States (AOSIS) advocated in the negotiations the establishment of a fund, to be provided by those who have caused global climate change, to compensate those who have suffered as a conse- quence. This suggestion, however, has hitherto been ignored by most states and is reduced in the FCCC to the provision: “The developed coun- try Parties... shall also assist the developing country Parties that are particularly vulnerable to the adverse effects of climate change in meeting costs of adaptation to those adverse effects” (FCCC 1992, Article 4(4)). Perhaps perversely, questions of compensation have also been raised by OPEC countries. They argue that since implementation of the FCCC will impose disproportionate costs on them, they should be compensated for any such losses (Kassler and Paterson 1997).2 Concerning distributive justice, most of the literature concerning equity in climate negotiations and justice in general argues that justice requires policy responses that significantly address existing international inequali- ties (e.g., Shue 1999). The general political theory literature argues this most clearly. The climate change literature, being more policy oriented, tends to favor an equal per capita emissions position as the most equitable solution. However, it is considered, at least in the short term, to be politi- cally infeasible. Thus a mixture of the egalitarian with the “comparable burdens” position is advocated (e.g., Grubb et al. 1992, 321; Young 1991): emissions are to be distributed over time in a fashion that moves from the existing distribution toward an egalitarian one. However, an egalitarian position (at least in the sense that radical reductions in existing inequalities are advocated) is still seen as the primary implication of jus- tice; the “comparable burdens” position is seen as a consequence of prac- tical politics. This argument in favor of at least a significantly more egalitarian world leads to a number of conclusions on how to address equity concerns in relation to global climate change. Two practical questions arise in this context. The first is the distribution of emissions reductions and the costs associated with them. There is a clear consensus that the primary costs should be borne by industrialized countries, and the “historical responsi- bility” argument has been invoked most often in climate negotiations. 124 Matthew Paterson This is also reflected in the FCCC, especially Article 3(1) on the principle of “common but differentiated responsibilities,” and in the division within Article 4 between obligations of all parties and obligations to limit emissions for the developed-country parties. Conflict has arisen over the fair allocation of emissions over the longer term; developing countries, and some commentators (e.g., Agarwal and Narain 1990; Bertram 1992; Epstein and Gupta 1990; Grubb 1989; Krause, Koomey, and Bach 1989) have argued that long-term emissions should be allocated on an equal per capita basis. While this position is explicitly rejected by most industri- alized-country negotiators as unjust (because of the immediate burden it may place on them) and by many commentators as politically impractical (because of the objections of powerful states), it remains the most persua- sive argument on ethical grounds. Indeed objections to it as a basic princi- ple have subsided to an extent (practical objections nevertheless remain), enabling some to go on to specify in detail how the emissions levels of industrialized and developing countries may converge over time (e.g., Jepma and Munasinghe 1998; Meyer 1994; Shukla 1999). The second question raised in the negotiations concerns “financial re- sources and technology transfers.” The implications of justice involve substantial financial and technological transfers from North to South, to assist developing countries in minimizing the growth of their greenhouse gas emissions during phases of accelerated economic growth. By way of example, Grubb puts likely North-South transfers to address global warming at $100 billion per year (Grubb 1990, 287). This magnitude of transfers envisioned is not uncommon. The argument is justified on the basis that Northern countries have caused global climate change, and any actions by the South must be conditional on financial and technological assistance from the North (see FCCC 1992, Article 4(7)). However, in practice, it has been much more conflictual. While accepting, in principle, that this would be a just distribution of the burden, Northern countries have, in practice, refused to provide anything more than nominal sums. On the institutional side, however, significant advances have been made with the emergence of systems and mechanisms such as Joint Implementa- tion and the Clean Development Mechanism, which may provide for new financial resources and technology transfers in the future (see chapters 2, 11–13), both of which can be said to reflect acceptance of principles of Principles of Justice and Global Climate Change 125 justice that reduction of international inequalities is a necessary conse- quence of justice in climate negotiations. A fairly strong consensus exists among analysts that one of the most practical ways of addressing both these former questions is to devise a system of tradable permits for greenhouse gas emissions (e.g., Grubb 1989). This would enable an egalitarian principle of the distribution of emissions to be matched with minimizing the costs to the North of meet- ing reduction targets, and would also facilitate North-South financial and technological transfers. It has the advantages, too, of meeting the con- cerns of economists and policy makers for efficiency in implementing obligations. Finally, the question of distributive justice raises distributive issues among industrialized countries. This has emerged in negotiations in terms of the problem of “differentiation”—whether Annex I countries’ obliga- tions under the FCCC should be differentiated or not.3 The problem is clearly less acute than that between North and South because of the smaller variations of per capita gross domestic product. But both “natu- ral” variations (land area, climate, dependence on particular commodi- ties) and past efforts in promoting energy efficiency and conservation, both of which affect a country’s marginal costs of emissions abatement, have been used by various countries to suggest that commitments should be differentiated because of the equity considerations. The deal struck at Kyoto reflects such concerns to an extent. While that agreement appears to be primarily a result of Realpolitik, according to the position advo- cated by Brian Barry at least (see above), the deal may reflect an accep- tance by negotiators that “none can reasonably reject” arguments that countries’ situations should be taken into account while negotiating par- ticular agreements. 4 Conclusions Most contemporary commentators regard notions of equity or justice to be central to the successful formulation of global climate change policies. They also predominantly suggest that a position that explicitly aims to reduce existing international inequalities, through North-South transfers and a disproportionate burden sharing by the North, is most likely to 126 Matthew Paterson satisfy the implications of justice. The empirical relevance of justice de- pends on which theoretical orientation given in chapter 3 (realism, histor- ical materialism, institutionalism) is considered most plausible. However, this discussion directs questions to each perspective. Realists would need to demonstrate that the way that justice was used in climate change nego- tiations was purely rhetoric and had no substantive impact on the out- come. This would be a difficult claim to sustain in this policy field. Marxists would also be skeptical about the value of talking about justice in relation to international negotiations on global climate change. They would suggest that the reductions in international inequality cannot be achieved within the present world capitalist system. The argument in fa- vor of equity or justice fits most easily with the liberal institutionalist perspective, which emphasizes the importance of norms. The challenge is posed by asking how questions of justice become institutionalized in international processes—that is, how the varying conceptions of justice produce stable norms over the long term. In the negotiations, justice was used to support specific arguments or positions, and sometimes was used to back up interests, as realists and Marxists would both emphasize. However, the reliance on a discourse of justice meant that not all posi- tions could be supported. This approach also exerts a constraint on the outcomes of future negotiations on the further development of a global climate change regime. Notes 1. For an overview of these positions, see Brown 1992. For an extended analysis of how they apply to climate change, see Paterson 1996b. 2. This has been only one of many arguments made by them in negotiations, primarily to slow down the pace of those negotiations and limit efforts to reduce CO 2 emissions. See Kassler and Paterson 1997 for a full analysis. 3. See the various contributions to Paterson and Grubb 1996 for differing per- spectives on this question. Business and Politics, Vol. 5, No. 2, August 2003 Bargains Old and New: Multinational Corporations in Global Governance DAVID L. LEVY†* & ASEEM PRAKASH‡ †University of Massachusetts, Boston, ‡University of Washington-Seattle ABSTRACT This paper outlines an approach for understanding the role of multinational corpora- tions (MNCs) in global governance. We develop a typology of regime types with two dimensions, the goal of the regime, which can be market enabling or regulatory, and the location of authority, which can be national, regional, or international, with public and private elements. MNCs tend to support the creation of market enabling regimes at the international level, and prefer to keep social or environmental regulation under national or private authority. However, these are only generalizations and MNCs develop preferences based on their relative influence in various arenas, the costs of political participation, and competitive considerations. We argue that institutions of global governance represent the outcome of a series of negotiations among corporations, states, and non-state actors. The preferences and power of MNCs vary across issues and sectors, and from one negotiating forum to another, accounting for the uneven and fragmented nature of the resulting system. Our approach differs from the traditional FDI bargaining framework in that it recognizes the multi-party nature of negotiations and multiple sources of power. Moreover, the complexity and dynamic nature of the process results in a somewhat indeterminate process. Introduction International regimes are a critical element of global governance. Regime theory has been widely criticized for its state centered approach, and increasing attention has been paid to domestic political factors and non-state actors, especially non-governmental organizations (NGOs).1 Very few, however, have examined regimes from the perspective of multinational corporations (MNCs), despite their critical influence in the international political economy. Drawing on international business and international political economy literatures, this paper outlines an approach to analyzing regimes from the perspective of MNCs. In doing so, we build upon the work of Raymond Vernon, whose Product Life Cycle theory of trade and investment moved the conceptual spotlight from nations to corporate strategy.2 In this tradition, we seek to understand the formation and content of regimes of international governance in terms of the interests and strategies of MNCs. * Correspondence: David L. Levy, Professor, Department of Management, University of Massachusetts, 100 Morrissey Boulevard, Boston, MA 02125, USA. Tel: (617) 287-7860; E-mail: [email protected] 1. Higgott, Underhill and Bieler (1999); Strange (1996). 2. Vernon (1966). 131 1369-5258 print/ISSN 1469-3569 online/03/020131-20  2003 Taylor & Francis Ltd DOI: 10.1080/1369525032000125358 David L. Levy & Aseem Prakash The increasing internationalization of production and markets over the last several decades, however uneven and incomplete, has been accompanied by the emergence of various forms of supranational/global governance, both at regional and international levels. From regional trade agreements to international environ- mental treaties, we are witnessing the emergence of multilateral institutions and sources of authority that increasingly influence the operations of multinational corporations (MNCs). Even in the absence of a supranational authority, negoti- ations among governments, firms and NGOs are leading to the establishment of regimes—rules, norms, codes of conduct, and standards—that constrain, facili- tate, and shape MNCs’ market behaviors.3 In recent debates, three arguments have frequently been made, often implic- itly, concerning the power and preferences of MNCs in relation to institutions of global governance. The first argument is that the power of MNCs to shape outcomes has increased in relation to governments and other societal actors (the decline of the Westphalian state hypothesis). The second is that MNCs prefer to see regulatory authority shift away from national governments and toward supranational institutions, and that this shift has, indeed, been underway (the decline of the regulatory state hypothesis). The third is that, as part of the MNC agenda, supranational regimes facilitate the lowering of regulatory standards across jurisdictions, particularly in the areas of labor, environment, health and safety (the race-to-the bottom hypothesis). This paper critically examines these arguments. We find that MNCs are not always seeking the extension of supranational regimes to lower regulatory standards; indeed they sometimes seek to enhance domestic governments’ capacities to establish stringent regulations. Moreover, the complexity and dynamic nature of regime bargaining processes, combined with strategic behav- iors by MNCs, NGOs, and governments, lends a degree of indeterminacy to regime formation processes. Consequently, MNCs’ goals and interests vary across issues and sectors, and MNCs do not always achieve what they want. We explore the preferences of MNCs through a new typology of regimes. We identify key elements of a new version of the MNC-state bargaining theory, which serves to shed light on the ability of MNCs to secure the type of regime they desire. The paper thus examines MNCs’ preferences and power regarding international regimes. A typology of regimes Regime theory, which has attempted to explain the emergence and diversity of supranational institutions of governance, could usefully inform our understand- ing of the role of MNCs in the structuring of international governance.4 Key themes in this literature relate to the conditions under which regimes arise, their function, and how they affect collective outcomes. Developed to explain the institutionalized mechanisms of international co-operation within an anarchic world, regime theory has come to employ a notion of governance that is similar 3. Haggard and Simmons (1987); Keohane (1983). 4. Young (1994). 132 Multinational Corporations in Global Governance to that used by students of domestic politics. In his widely used definition, Krasner posits that regimes are “implicit or explicit principles, norms and decision-making procedures around which actors’ expectations converge in a given area of international relations.”5 In a similar vein, Keohane has defined regimes as “persistent and connected sets of rules and practices that prescribe behavioral roles, constrain activity, and shape expectations.”6 Notable in these and other definitions is the recognition of cognitive and normative dimensions of ordered international conduct, and their abstraction from specific organizational forms. Young emphasizes this distinction between governance, “in the sense of rules of the game that serve to define social practices, assign roles, and guide interactions,”7 and specific organizations as “material entities possessing offices, personnel, budgets, equipment, and more often than not, legal personality.”8 Much of regime theory has concentrated on describing the processes by which states agree to give up sovereignty in policy areas through the implementation of international agreements. In this paper, we propose that MNCs are key actors in the formation of governance regimes and that corporate strategies play an important role in the trajectory of regime development. In particular, David Baron has argued that firms need to develop an integrated strategy encompassing both their market and non-market environments.9 Specifically, firms need to examine how a regime bestows benefits or imposes costs in relation to their market competitors, and consider how a regime influences the balance of power in relation to non-market actors such as NGOs. Negotiations over institutions of governance give rise to regimes that vary in two key dimensions that matter to MNCs, regime purpose and regime authority structure. The first dimension relates to whether the primary objective of the regime is either market liberalization by expanding market opportunities and reducing transaction costs, or the imposition of regulatory constraints for environmental, social, or other purposes.10 Firms are generally viewed as supportive of market-enabling regimes, such as the General Agreement on Tariffs and Trade (GATT) and now, the World Trade Organization (WTO), under whose auspices the liberalization of international trade has proceeded apace during the last five decades. Of course, creating opportunities for some firms may present threats for others. Typically, firms in protected or inefficient sectors oppose trade liberalization, with the recent campaign by the US textile industry against relaxing the Multi-Fiber Agreement round being a case in point. Social and environmental regulation, by contrast, is generally viewed as im- posing constraints on business, restricting market opportunities for MNCs and creating costly compliance requirements. For example, the Basle convention restricted international trade in hazardous waste and the Montreal Protocol phased out production and trade of ozone-depleting chemicals. While many 5. Krasner (1983) p. 2. 6. Keohane, Haas and Levy (1993). 7. Young (1994) p. 4. 8. Young (1994) p. 15. 9. Baron (1995). 10. Levy and Egan (2000) refer to these regime types as “market-enabling” and “regulatory”. 133 David L. Levy & Aseem Prakash TABLE 1. New bargains: a typology of regimes Regime purpose Location of authority Market enabling Regulatory Domestic Trade-related intellectual ISO 14001, property rights Forest Stewardship Council Supranational World Trade Organization Montreal Protocol on Ozone Depleting Gases Nuclear Non-Proliferation Treaty firms are expected to oppose such regulatory regimes, particular competitive concerns can alter the situation. The second dimension of our regime typology pertains to the regime’s authority structure, specifically the location of authority for monitoring compli- ance and enforcement of regime provisions. In particular, we are interested in the location of authority that monitors and enforces rules influencing MNCs’ sourcing, operations, sales, and profitability. This authority can be located at the national or supranational (regional or international) levels. Furthermore, this authority can be vested with state or private actors. Authority structures can also be complex and hybrid. Public law may provide for private monitoring and enforcement. To illustrate, the provision of private attorneys-general in the American environmental jurisprudence enables private actors to prosecute firms for alleged environmental violations and even recover costs of litigation. Inter- national environmental regimes generally have some monitoring mechanisms under the auspices of supranational institutions, but much of their implemen- tation and enforcement is at the national level. Together, the two attributes, regime purpose and regime authority structure, yield a matrix of four analytical regime types: market enabling-domestic, market enabling-supranational, regulatory-domestic, and regulatory-supranational (Table 1). We briefly discuss MNCs’ preferences for these regime types below. Our key argument is that to understand MNCs’ support or opposition for a particular regime type, one has to examine MNCs’ perceptions of their relative influence versus other actors across governance arenas as well as the competitive implica- tions of specific regimes. Regime purpose The WTO and the now-stalled Multilateral Agreement on Investment (MAI) are examples of market-enabling regimes, which tend to reduce transaction costs and provide collective goods important to MNCs, such as standards, multilateral recognition, and enforcement of Intellectual Property Rights (IPRs). As Lake has remarked concerning the MAI and WTO, “governments are constrained from 134 Multinational Corporations in Global Governance exercising sovereign powers but no higher authorities are created—in each case, further widening the private sphere.”11 On the face of it, MNCs should support market-enabling regimes. However, while some sectors, such as banking, pharmaceuticals, agriculture, and electron- ics, have been strong supporters of multilateral market-enabling agreements, others, notably the automobile industry and some consumer appliance firms, have preferred a strategy of regional integration, such as that offered by NAFTA. This regional approach offers companies a route to reconciling the potentially conflicting objectives of rationalizing production and implementing lean pro- duction,12 while providing a degree of protection against European and Japanese competitors.13 Moreover, firms operating in highly regulated markets sometimes oppose the dismantling of regulations.14 The railroad and trucking industries are classic examples of how regulations can serve as a barrier to entry.15 MNCs may also oppose the expansion of a market-enabling regime if it puts them at a competitive disadvantage. The recent dispute between the European Union and the United States over China’s entry to the WTO included the proposed rules for entering China’s insurance industry. China wanted to require foreign insurance companies to have joint ventures with local companies. The American insurance giant, American Insurance Group (AIG), however, already had a presence in China and was exempted from this requirement. European MNCs feared that this provided a competitive advantage to AIG, so they lobbied their governments to hold up China’s entry in the WTO till rules were modified to provide a more level playing field.16 Regulatory regimes are primarily designed to impose constraints on aspects of corporate behavior, including sourcing, production, sales, and distribution of profits. These types of regimes typically address the social costs of corporate operations and provide collective goods, such as environmental improvements and worker safety. Examples include the 2000 Cartegena Protocol on Biosafety, the 1997 Kyoto Protocol to reduce emissions of greenhouse gases, and various proposals for codes of conduct regarding labor standards and the environment. Many regimes have a complex, hybrid nature, which requires decomposition for the sake of analysis. Regulatory regimes whose primary purpose is to constrain MNC behavior may generate new markets that did not previously exist. For example, the Kyoto protocol, which regulates the emission of carbon dioxide and other greenhouse gases, will establish global markets for carbon trading among firms and countries. Such markets, which create opportunities for companies to invest in low-emission technologies, have not existed before because the global atmosphere has been treated as an open access resource. Regulatory regimes can also facilitate trade through the harmonization of technical and environmental standards.17 11. Lake (1999) p. 47. 12. Levy (1997). 13. Eden and Molot (1993). 14. Stigler (1971). 15. Kolko (1963). 16. Chandler (2001). 17. Haufler (2001). 135 David L. Levy & Aseem Prakash Market enabling regimes frequently have regulatory features. Regional trade- liberalization agreements such as the European Union and NAFTA both have market-limiting components advocated by specific sectors; the local-content requirements for the auto industry in NAFTA are a case in point.18 The NAFTA side agreements on labor and the environment, though generally viewed as weak, represent regulatory elements adopted to accommodate social pressures. The governance of intellectual property rights (IPRs) is another example of a complex, hybrid regime. The enforcement of IPRs can represent a form of protectionism for MNCs that constrains competition, though the establishment of property rights also has a market-enabling dimension by encouraging invest- ment in new technologies and trade in resultant products. For example, a key factor in the historical development of the Indian pharmaceutical industry was the ability of Indian firms to manufacture pharmaceuticals, as long as they bypassed patents held by Western MNCs by adopting different manufacturing processes. The TRIPS agreement closed this ‘loophole’, thereby expanding markets for MNCs at the expense of local pharmaceutical firms in developing countries.19 Arguably, MNCs will oppose the formation of international regulatory regimes precisely because they solve international collective action problems and enable regulation. These agreements tend to raise final product prices, limit demand, and impose compliance costs on MNCs. As David Lake puts it, “the private actors prospering in the interstices of political authority are not leading the charge for supra-national entities designed to regulate their behavior more effectively.”20 However, this may not be true if regulatory regimes impose asymmetrical costs across firms. Thus, in formulating their political strategies, MNCs pay close attention not to regulation per se, but rather to the regulatory costs they bear in relation to their market competitors. Moreover, they are likely to consider carefully whether to undertake a political offensive individually or collectively. Trade associations have emerged as key vehicles for such collective political strategies, reducing the cost of political action. However, where asym- metrical costs of regulation offer opportunities for unilateral advantage, compa- nies are less likely to act in concert. To elaborate, regulatory regimes carry significant implications for competi- tiveness, as costs are imposed unevenly and new market opportunities could be created. In the case of ozone depletion, the major US producers of ozone depleting gases (CFCs) came to support an international agreement to reduce production. Dupont, the world’s largest CFC producer, faced a stagnant domestic market due to unilateral regulation in the US and saw the substance becoming a low-margin commodity.21 Dupont had invested heavily in substitute chemicals prior to the treaty, anticipating that its dominant market position, extensive distribution channels, and expertise in chemical engineering would lead the company to gain a strong position in CFC substitutes. European producers, by 18. Rugman and Gestrin (1993). 19. Sell (2002). 20. Lake (1999) p. 46. 21. Parson (1993); Rothenberg and Maxwell (1997). 136 Multinational Corporations in Global Governance contrast, opposed CFC controls because they enjoyed growing export markets, lacked domestic controls, and lagged in the development of CFC substitutes. Regulation can create barriers to entry in a number of ways; regulated industries, such as hazardous waste, frequently have complex procedures for certifying new processes, thereby stabilizing existing technologies and protecting market incumbents.22 Compliance activities also constitute a relatively fixed cost that result in economies of scale favoring larger incumbents.23 Companies sometimes initiate private, voluntary mechanisms, such as the chemical indus- try’s Responsible Care program, to raise public confidence, reduce the threat of governmental regulation, and discipline poor performers who might attract negative publicity and pressure for the whole industry.24 Some companies could gain relative advantage from regulations if they have lower compliance costs and are better situated to innovate.25 If companies have already adopted advanced technologies, they may wish to shape regulations to broaden the market for them or raise entry costs for rivals.26 A good example is the German insistence that the EU adopt some version of its “best available technology” clause for its Eco-Audit and Management System, an environmental governance code. Be- cause German laws require German firms to adopt best available technology, German firms wanted their European competitors to face the same cost struc- tures. Britain, on the other hand, generally adopts a more voluntaristic style of environmental governance and avoids policies that force specific technologies on its firms. Hence, British firms lobbied their government against agreeing to the German proposal.27 Regime authority structure Regimes vary widely in the location of their monitoring, enforcement, and sanctioning authorities. These can be situated at the domestic, regional, or supranational levels, and rely on public or private mechanisms. It is frequently assumed that MNCs seek to escape from the regulatory efforts of domestic governments and social forces by establishing international governance struc- tures beyond the reach of democratic accountability and pressures from labor and other social groups, which are primarily organized on a domestic basis.28 While MNCs have generally supported the establishment and expansion of international market enabling regimes such as the WTO and the MAI, MNCs have often fought to keep regulatory authority for environmental and social issues at the national level. The preferences of NGOs are frequently the inverse of MNCs; they tend to oppose the expansion of international market enabling regimes, but support international-level governance for regulatory regimes such as ozone depletion or labor rights. 22. Maloney and McCormick (1982). 23. Reinhardt (2000). 24. Garcia-Johnson (2000); Nash and Ehrenfeld (1997); Prakash (2000b). 25. Mitnick (1993). 26. Nehrt (1998). 27. Kollman and Prakash (2001). 28. Korten (1995). 137 David L. Levy & Aseem Prakash Preferences of MNCs for regime structures depend on their perceptions of their influence relative to NGOs and other protagonists in various fora. Levy and Egan, in a study of the climate change negotiations, have argued that the organizational, political, and discursive influence of US energy-related busi- nesses was much greater domestically than in the international arena.29 The negotiations involved more than 140 countries, many of which were remote from the influence of US companies. The international institutions guiding the negotiations, particularly the scientific assessment bodies, had developed a degree of autonomy and legitimacy that provided some insulation from the interests of particular countries or industry sectors. Supranational organizations seeking to extend environmental and social regulation are frequently perceived to be more sympathetic to NGOs than to MNCs. In terms of principal-agent theory, it is likely to be much harder for firms acting as principals to make international organizations and foreign governments act as their agents.30 It is therefore not surprising that some companies fear the emergence of an inter- national regulatory bureaucracy beyond the usual channels of influence. More- over, if international economic integration does indeed weaken the autonomy and sovereignty of nation states and erode NGOs’ access to decision-making at the national level, then MNCs will find that their leverage will increase at the national level. Even if internationalization is an incomplete and uneven process, the ideology of globalization and competitiveness seems to exert a disciplining effect on state managers and policy makers, producing the “competition state,” whose primary goal is to be an attractive location for MNC activity.31 Despite MNCs’ general antipathy toward international regulatory regimes, specific competitive considerations can mitigate this outlook. While efforts to coordinate social or environmental policies in international fora might sometimes lead to a costly upward harmonization of regulatory standards, MNCs aspiring to serve global markets often find a patchwork of national standards and regulations to be even more expensive, in terms of product adaptation, loss of economies of scale, and administrative expenses. Few MNCs pursue pure multidomestic strategies, which respond to local differences in taste, culture, and distribution channels, without also seeking some of the benefits of rationalization across markets.32 The desire for harmonization and economies of scale has clearly been one of the key economic drivers for the development of the governance structures of the EU,33 though weaker sectors, such as the European car industry, have sometimes sought national level regulations as a form of protectionism.34 Internationally harmonized regulations can also serve to preempt local stan- dards that are, in some instances, extremely strict. For example, the US automobile industry has been very keen to establish binding federal emission standards that would impose a constraint on states, particularly California and 29. Levy and Egan (1998). 30. Keim and Baysinger (1993). 31. Carnoy, Castells and Cohen (1993). 32. Bartlett and Ghoshal (1989). 33. Pollack and Shaffer (2001). 34. McLaughlin, Jordan and Maloney (1993). 138 Multinational Corporations in Global Governance Massachusetts. Harmonized standards, even if not representing a lowest common denominator, are likely to be weaker than the level set by the most aggressive local authority. The Codex Alimentarius, for instance, developed under the auspices of the WTO, is an international set of safety standards for chemicals in foodstuffs that has been widely criticized for its laxity and opaque process. MNC preferences for regime structures can also depend on the cost of engaging in negotiations in various arenas. The cost of international lobbying and bargaining efforts is not trivial, particularly for smaller companies. In a study by Getz of corporate political activity by companies involved in the ozone depletion issue, she found that only the largest and most profitable U.S. firms targeted international organizations.35 Getz argued that most firms would prefer to operate at the national level because that is where environmental laws are implemented and enforced, and most firms lack the financial resources and political sagacity to conduct international negotiations. Despite these concerns, the international arena could offer companies economies of scale in their political activities in two respects. First, MNCs might find that fewer resources are needed to resolve an issue in a single international forum than to negotiate the issue on a country-by-country basis. Second, an international forum offers MNCs the opportunity to share the costs of political activity with firms based in other countries. Indeed, Coen notes that while many companies have cut back on their government affairs budgets during the latter 1990s, they have increasingly turned to issue-specific international industry associations and alliances to share the costs and increase their leverage.36 Of course, cross-country institutional variations in the organization of labor and capital will significantly influence the propensities to use national-level associations as well as strategies employed to influence policy processes.37 Just as regimes can combine elements of market enabling and regulatory features, they can also exhibit complex authority structures. In many cases, the authority to monitor, enforce, and sanction are shared between domestic and supranational arenas. For example, the WTO provides a dispute resolution mechanism at the supranational level, but the decision on sanctions is taken at the domestic level. In the beef hormone case, the WTO ruled in favor of the US but the retaliatory tariffs imposed on EU products were decided solely by the US Trade Representative. In the climate change regime, supranational institutions conduct scientific assessments, negotiate country emission budgets, and establish broad guidelines for emission trading mechanisms, but each country is respon- sible for developing national mechanisms to control its emissions of greenhouse gases.38 Several authors have noted the rise of private sources of authority in international governance. Haufler has observed that self-regulation is particularly likely when companies face high risks of new government regulations, activist pressures threaten their reputation, and high asset specificity constrains strategic 35. Getz (1993). 36. Coen (1999). 37. Hillman and Keim (1995). 38. Grubb and Vrolijk and Brack (1999). 139 David L. Levy & Aseem Prakash options.39 Self-regulation is facilitated by high levels of information exchange, learning, and consensus within the industry. Industry codes and standards, such as the ISO 14000 environmental management standards, constitute private regulatory regimes but also become incorporated into governmental regulatory structures, creating complex hybrid forms.40 In disputes over commercial con- tracts, MNCs routinely require private arbitration as a condition of doing business41—the recent dispute between Enron and the Government of Maharash- tra, India, being a case in point. Importantly, in establishing some of these private regimes such as the Forest Stewardship Council, NGOs have been key actors. A bargaining approach to understanding international governance MNCs do not always succeed in securing the regimes they desire. This section examines how outcomes of negotiations over regime formation among MNCs, governments, and NGOs depend on the relative power of the actors and idiosyncrasies of the bargaining process. In the obsolescing bargaining model of the 1970s, MNCs wanted to maximize their share of financial gain, by keeping taxes and royalties paid to the host country low, and by gaining access to subsidies for capital investment and infrastructure development. In addition, MNCs were seen as desiring a predictable and stable environment, and auton- omy from “arbitrary” governmental interventions in areas such as currency conversion, profit repatriation and local content requirements. These goals have not disappeared in the new bargaining over international governance structures. Indeed, the effort to establish the MAI and broaden the WTO to include services (GATS), intellectual property rights (TRIPS), and trade-related aspects of foreign investment (TRIMS), can be understood, at least in part, as an attempt to incorporate some of these objectives into a new set of ground-rules for MNC–host country bargaining. Rather than bargain with states deal-by-deal, however, some of the new multilateral trade and investment regimes institution- alize MNC positions by greatly reducing the ability of states to impose performance requirements, discriminate between domestic and foreign investors, or otherwise reduce the value of an investment. Building upon the obsolescing bargaining model, we suggest that the complexity and dynamic nature of bargaining processes, with multiple actors attempting to exert leverage through various sources of power, leads to somewhat indeterminate outcomes.42 The bargaining model of MNC–host country relations focused primarily on bilateral regulatory regimes with domestic locus of authority. This model was developed in the context of the polarized debate in the 1970s between those who saw foreign direct investment (FDI) as a manifestation of the growing power of multinational corporations and fundamentally antithetical to host country inter- 39. Haufler (2001). 40. Clapp (1998); Cutler, Haufler and Porter (1999); Prakash (2000a). 41. Mattli (2001). 42. Braithwaite and Drahos (2000). 140 Multinational Corporations in Global Governance ests,43 and those who argued that the power of MNCs had been exaggerated and their economic benefits ignored.44 The bargaining model represented a pragmatic approach in which the benefits of FDI to the host country would be contingent on the specific contractual arrangements of each deal. MNCs and host countries would bargain over the distribution of benefits from each instance of FDI, and the bargaining power of each side was determined by the possession of rare or unique assets.45 MNCs, for example, might offer certain technological and marketing capabilities, while host countries could control access to natural resources and local markets.46 Over a period of time, the shifting balance of power between the MNC and the host country would tend to make the original bargain obsolete, leading to some renegotiation of terms.47 In the three decades since Vernon laid the groundwork for the bargaining model, evolving global political and economic conditions require its revision. As Vernon himself later recognized, conflict over the potential value of FDI to host countries has by and large disappeared.48 Whether through conviction or co- ercion, developing countries have increasingly opened their economies to trade and inward investment.49 In part, this trend reflects the broader ideological shift towards open markets and deregulation. As tools of governance, market-enabling regimes had become as important as regulatory regimes. During the 1980s, scholars shifted their attention from concerns about MNC power toward the efficiency gains available in the internalized structure of the MNC.50 Intellectual and political challenges to the role of MNCs waned as the institutional bases for such perspectives weakened. In the new atmosphere, collaborative dimensions of state–MNC relations have received more attention than conflict.51 In the 1990s, however, the increased visibility of NGOs opposing unfettered globalization has renewed debates over the power of MNCs vis-à-vis other actors. NGOs have successfully added non-economic issues such as environmen- tal standards to bargaining agendas that traditionally have focused on MNC–state distributional concerns. Thus, dyadic bargaining between states and MNCs has developed into multiparty bargaining among NGOs, governments and firms. A confluence of issues, from genetically modified organisms to sweatshops, has mobilized a new generation of activists and generated pressure for new modes of international governance that accord a more significant role to civil society.52 Governments and MNCs have increasingly granted NGOs a seat at the negotiat- ing table, and consequently the strategies and tactics of NGOs influence the bargaining process over governance structures and processes.53 43. Barnet and Muller (1974); Evans (1979). 44. Gilpin (1975); Johnson (1970). 45. Vernon (1971). 46. Fagre and Wells (1982); Kobrin (1987). 47. Moran (1985). 48. Vernon and Spar (1990). 49. Dunning (1993); Strange (1993). 50. Dunning (1988); Hennart (1982). 51. Murtha and Lenway (1994). 52. O’Brien et al. (2000), Prakash and Kollman (2004). 53. Newell (2001), but see Clark et al. (1998). 141 David L. Levy & Aseem Prakash The revised bargaining model presented here reflects the emergence of a new, broader, terrain of contestation, one that relates to the very structures and processes of international governance. It seeks to examine both regulatory and market-enabling regimes. Eden has discussed the multifaceted nature of global- ization and has identified three components in particular: the convergence of production, financial, and technological structures, the synchronization of na- tional economies, and the interpenetration of flows of trade, investment, and technology.54 Concurrent with this economic globalization, though less noted in the literature, is the growth of governance structures at regional and international levels that provide an institutional context of rules and norms for the global economy. Just as MNCs have been major agents of economic interdependence, they are interested and important actors in constructing the edifice of the new global polity. In doing so, they negotiate and bargain with a range of other actors, including home and host governments, NGOs, and existing international and supra-national organizations. Despite the effort within regime theory to focus attention on the institutions of governance rather than governments, regime theory has been much criticized for its state-centered perspective,55 and for its functionalist emphasis on reducing transaction costs and solving collective action problems.56 Only recently have scholars begun to take non-state actors more seriously as important agents in the processes of international governance.57 Peter Haas has pointed to the import- ance of “epistemic communities” of scientists as key agents in shaping environ- mental regimes,58 while some have looked more broadly to the role of global civil society and business.59 If regime theory has been too state-centered, then the neo-Gramscian histori- cal materialist perspective in IR has placed too much emphasis on the power of capital in the global polity.60 In the process of forging a transnational hegemonic bloc dominated by MNCs, in alliance with internationally oriented state and NGO elites, national states are viewed as passively adapting to accommodate the demands of the new global economy. Robinson argues that national states are converted “into transmission belts and filtering devices for the imposition of the transnational agenda.”61 Although Gramsci’s concept of hegemony represents a negotiated consensus reflecting a historically specific balance of social forces, the rendition in the IR literature tends to be a top-down account in which national and global governance structures are determined by the economic needs of MNCs. 54. Eden (1993). 55. Litfin (1994); Strange (1993). 56. Keohane (1983); Young (1989). 57. Higgott, Underhill and Bieler (1999). 58. Haas (1992). 59. Cutler, Haufler and Porter (1999); Lipschutz (1992); Wapner (1995). 60. Cox (1987); van der Pijl (1984). 61. Robinson (1996) p. 19. 142 Multinational Corporations in Global Governance Characteristics of the bargaining terrain We outline here the key characteristics of the new bargaining terrain underlying the processes of regime formation. In doing so, we suggest a theoretical path that avoids the state-centrism of regime theory and the deterministic materialism of the neo-Gramscian approach, while building on insights from these two perspec- tives. It offers a bottom-up “micro–macro” approach62 in which regimes are the negotiated outcome of bargaining amongst MNCs, states, NGOs, and other actors. We draw on regime theory to view global governance as the development of norms, cognitive frames, as well as organizational infrastructure. We also note that regime characteristics vary on two critical dimensions: regime purpose and location of authority. Thus, not all regimes are mechanisms for equitable solutions to collective action problems. The neo-Gramscian perspective places regime formation in the broader context of political contests between different groups of social actors in the global polity. Regime structures and processes therefore reflect the varying power, resources, and strategies of the various actors in these contests. Despite the substantial material resources possessed by MNCs, other actors also have considerable influence over regime-building processes, on account of their organizational capabilities and ability to resonate with particular ideological and cultural discourses. Moreover, as discussed subsequently, MNCs from different sectors and with different competitive positions rarely speak in one voice on issues of supranational governance, thereby creating political space for other societal actors to exploit these differences and push their agendas. The outcomes of these negotiations among host and home governments, business, and civil society, over a series of specific issue arenas, are constitutive of the emerging international system of governance, accounting for its untidy and uneven form. In addition to examining both regulatory and market enabling regimes, our approach differs from the traditional bargaining model in three respects: the bargaining process involves multiple actors, these actors can draw upon multiple bases of power, and the bargaining process is dynamic, extended over time, and somewhat indeterminate. Multi-actor bargaining In the traditional bargaining model, negotiations were typically bilateral, be- tween the MNC and the host government. Further, the old bargaining framework presumed the state to be a unitary actor negotiating as a single entity with a given set of interests. In our revised approach, bargaining is a multi-actor process among NGOs, states, firms, and international organizations. Indeed, even states may be represented by multiple authorities, such as departments of environment and state, with conflicting interests. Organizations representing labor, environmentalists, scientists and other elements of civil society have been particularly active in negotiations over environmental regimes, such as those for 62. Braithwaite and Drahos (2000). 143 David L. Levy & Aseem Prakash climate change,63 ozone depletion,64 and biodiversity,65 as well as for private codes of conduct regarding MNCs in developing countries. Even when not seated directly at the negotiating table, activist groups have exerted considerable influence through street demonstrations and through the dissemination of infor- mation; some have attributed the derailing of the MAI to the strategic use of the Internet by activist NGOs.66 Even the original Bretton Woods institutions, the World Bank and the International Monetary Fund, which were established through negotiations among a small number of states, have gradually been opening themselves to non-state influences.67 The implication of a multi-actor bargaining perspective is that governments and firms are now subjected to several influences, often exercised through traditional as well as non-traditional channels. Thus, firms and governments exercise less control over the bargaining process, and bargain outcomes are more uncertain. A broader range of goals is up for negotiation, and a more diverse set of norms and values are likely to be introduced. The result is a greater space for potential conflict, yet simultaneously more opportunities for opportunistic coali- tions. One of the implications then is that it is difficult to find “pure” regime types: to satisfy diverse constituencies most regimes have both regulatory and market-enabling features. For example, to get sufficient support in the Congress for NAFTA, a market-enabling regime, President Clinton had to agree to incorporate certain regulatory features to win support from the environmental- ists. Relative power In the traditional bargaining model, power was derived from the possession of unique assets, market access, and technologies. Indeed, the possession of firm-specific advantages provides the raison d’etre for MNCs to exist.68 Simi- larly, a country’s power derives from its ability to offer access to large markets or valuable mineral resources. In the revised bargaining perspective, economic power is but one of several sources of leverage. Also, the power of MNCs now needs to be assessed relative to NGOs as well as host governments. The power to frame debates within particular discursive and cultural contexts has increasingly been recognized as a key factor in the course of international negotiations.69 Negotiations over environmental regulatory regimes, for example, often revolve around contested claims concerning science.70 Industry has gener- ally advocated for a “sound science” approach that requires a high burden of proof before regulatory action is taken, while environmental NGOs and some 63. Newell (2000). 64. Litfin (1994). 65. Levidow (1999). 66. Kobrin (1998). 67. Scholte (2000). 68. Dunning (1988). 69. Haas (1996); Litfin (1994). 70. Jasanoff (1990). 144 Multinational Corporations in Global Governance European governments have urged adoption of the “precautionary principle.” Keohane and Nye have used the term “soft power” to describe: […] the ability to get desired outcomes because others want what you want. It is the ability to achieve goals through attraction rather than coercion. It works by convincing others to follow or getting them to agree to norms and institutions that produce the desired behavior. Soft power can rest on the appeal of one’s ideas or culture or the ability to set the agenda through standards and institutions that shape the preferences of others.71 The Gramscian concept of hegemony similarly rests on a form of “soft power” that generates legitimacy and consent by projecting intellectual and moral leadership and a sense of common interests. A key implication of the discursive aspect of power is that actors’ interests and preferences are not fixed by structural circumstances, but can be shifted by framing issues in particular ways. Thus, firms can establish new alliances not merely through traditional means of offering material incentives but also by providing information and new framings for issues. Organizational structures and capacity also serve as a critical resource in the exercise of power. Murtha and Lenway have discussed how governments can deploy their organizational capabilities and political institutional structures in a strategic manner to influence MNC investment behavior.72 NGOs are frequently able to compensate for their lack of material resources by coordinating their lobbying and information dissemination and by appealing to moral principles. Indeed, many scholars have argued that an embryonic global civil society, which is somewhat autonomous from the state-centric system, is starting to emerge.73 MNCs most commonly coordinate their input into international negotiations through various sector-specific industry associations, but also form transnational issue-specific groups around significant issues.74 Despite diverging perspectives on regulatory issues among MNCs from different sectors and countries, organi- zations such as the International Chamber of Commerce and the Trans-Atlantic Business Dialogue have been establishing working groups on specific issues to improve the level of international and cross-sector coordination as well as to fill in the “expertise gap.” Such issue specific and/or industry specific coalitions are important in strengthening MNCs bargaining power in relation to governments. The emergence of several new bases of power implies that the outcomes of the bargaining process is now critically influenced by bargaining strategies, es- pecially regarding how actors are able to project their perspective in the media. This requires MNCs to develop local as well as global political competencies, as they are trying to fend off challenges at multiple levels. Again, such indetermi- nacies and multiple bases of power lead to regimes that do not correspond to ideal types, but rather incorporate both regulatory and market-enabling features. 71. Keohane and Nye (1998) p. 86. 72. Murtha and Lenway (1994). 73. Florini (2000); Lipschutz (1992); Rosenau (1992). 74. Coen (1999). 145 David L. Levy & Aseem Prakash Bargaining process dynamics The traditional bargaining framework suggested that relative power between the MNC and the host country might shift over time, leading to pressure for renegotiations. Most bargaining theory proponents argued that MNCs lost the key bargaining chip of capital mobility once an investment was made, and that host governments gained power over time as local personnel gained technical expertise and managerial capabilities.75 Critics of this view claimed that contin- ued innovation by MNCs, control of export markets, multi-lateral financing arrangements, alliances with host country elites, and the dependence of host countries on private sources for future investments, would constrain and even diminish host country autonomy and power.76 Thus the bargaining framework did embody a dynamic element that considered shifts in power and the pressure to revise agreements. Nevertheless, each bargain was a discrete event occurring at a specific point in time; if shifts in power and outcomes were analyzed for two bargaining events, this was an exercise in comparative statics, and linkages across separate bargaining domains were rarely examined. In the revised perspective, we view bargaining as an ongoing path-dependent process, sometimes extended over many years. This is particularly apt for bargaining over institutions of governance. Clearly, market-enabling regimes such as the WTO and regulatory regimes such as that for climate change have evolved over many rounds of negotiation, each of which built on the norms, rules, institutions, and collective experience developed during previous rounds. Linkages also exist across regimes. For example, the institutional arrangements for providing scientific assessments to the ozone negotiations became the reference point for the climate regime. More broadly, the market-based norms of dominant regimes such as the WTO have informed the premises of regulatory regimes. Moreover, it is apparent that the process of negotiation itself exposes companies to new institutional settings and viewpoints, which have the potential to shift corporate perceptions of their interests. For example, during the climate regime negotiations, MNCs such as BP and Volkswagen shifted their positions from opposition toward support, as they developed the view that environmental and business goals can be compatible.77 In the traditional FDI bargaining framework, the relative power of each side determined the division of surplus from the investment between the parties.78 In our perspective, the complex and dynamic nature of negotiations combined with strategic behavior by actors makes the outcome somewhat indeterminate, and the most obviously powerful actor does not always win.79 Outcomes are thus a function of the specific processes and context of each regime. Oran Young argues that “institutional bargaining almost always involves a major element of 75. Moran (1985). 76. Evans (1979); Gereffi (1985). 77. Levy and Rothenberg (2002). 78. Moon and Lado (2000). 79. This would appear to make it difficult to test our bargaining model empirically. One approach might be to propose that the complexity of negotiations, in terms of number of parties and issue linkages, reduces the importance of material resources in determining outcomes. 146 Multinational Corporations in Global Governance integrative bargaining in contrast to distributive bargaining.”80 In other words, regime formation is not a zero-sum game, and, as a result, the control of economic and material resources is less important in determining the outcome. Rather, negotiations require a great deal of strategic positioning and bargaining skill, in which actors with less power in the traditional sense of material resources can sometimes outmaneuver their rivals. Conclusions This paper outlines an approach for understanding the role of MNCs in international governance that is based on a typology of regime types that is useful for analyzing MNC preferences, and that builds on the bargaining model of foreign direct investment (FDI). In our characterization, regimes vary in two key dimensions, the goal of the regime, which can be market enabling or regulatory, and the location of authority. However, such ideal types seldom exist and most regimes incorporate both market enabling and regulatory features to satisfy diverse constituencies. In general, MNCs tend to support the creation of market enabling regimes at the international level, and, if they are under pressure to accede to social or environmental regulation, prefer that the locus of authority be national and private. However, there are many instances where these general- izations do not hold, and MNCs assess their preferences in light of their relative influence in various arenas, the costs of political participation, and competitive considerations specific to each regime and industry. Just as in the original bargaining model, MNCs in international governance are neither omnipotent ogres nor gentle giants pursuing the common interest; rather, they bargain with states, NGOs, and other actors over the form and structure of particular international agreements and regimes. We argue that the emergent institutions of global governance represent the outcome of a series of negotiations; the preferences and power of MNCs vary across issues and sectors, and from one negotiating forum to another, which accounts for the uneven and fragmented nature of the resulting system. Our conceptualization of bargaining over governance structures differs from the traditional framework in that it recognizes the multi-party nature of negotiations, multiple sources of power, and the complexity and dynamic nature of the bargaining process. The resultant indeterminacy of outcomes suggests that while MNCs are powerful actors, they do not always succeed in imposing their preferred regime type. Moreover, regimes are shaped by the particular strategies of MNCs operating in specific industry and competitive contexts, leading to idiosyncratic outcomes that are at variance with predictions based on simple hypotheses such as the decline of the regulatory state or the race-to-the-bottom. We have chosen to focus on the preferences and power of MNCs. Future research could build upon this approach to examine the positions of states, international institutions and non-state actors. Overall, it may well be possible to discern a trend toward private sources of authority and an increase in the power of MNCs relative to states and NGOs, but an endpoint “when corporations rule 80. Young (1994) p. 127. 147

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