, Research Paper
“The transnational corporate system in the late 1990s”
by R?binson Rojas (1997)
Transnational direct investment in less developed societies in the 1990s is consolidating further the historical regional spheres of influence by the former colonial powers.
By and large, Latin America, Africa, Asia and Eastern Europe are becoming more than ever “spheres of control of production and trade” by the financial and industrial centers of the world.
Globalization is a task undertaken by the transnational corporate system, and the system has three clear centers (United States, Japan, and the major economies of the European Union). Those centers attract almost totally the flows of international payment to factors of production, creating a financial situation where capital flows from poor societies to rich societies, as it was in the times of colonization and imperial expansion from the 1500s to the 1930s.
The other main characteristic of the transnational corporate system during the 1990s was the speeding up of “mergers and acquisitions” which is one indicator of concentration of capital.
According to ‘Financial Market Trends’, OECD, July 1997, privatizations were a large contributor to acquisitions: “worldwide receipts from privatizations amounted to a record $88 billion in 1996, of which $68 billion came from OECD countries”…and, the most dramatic fact is that “in many countries, particularly in smaller OECD countries and in the developing world, the sale of public companies to foreign investors has been the primary source of inward investment in recent years”. That is, the contribution to new investments has been very small.
‘Financial Market Trends’ indicates that “global flows of direct investment are dominated by mergers and acquisitions in value terms. In the United States, for example, acquisitions represented 85 per cent of foreign investment in 1995, with establishments contributing only 15 per cent”…”By all accounts, mergers and acquisitions reached record levels in 1996″…and…”the impact of cross-border mergers and acquisitions on total foreign direct investment flows is likely to
grow in the future”.
It is estimated that after eight years of continuous growth cross-border mergers and acquisitions reached a record $263 million in 1996, which is equivalent to about 80% of the total amount of flows of foreign direct investment towards less developed societies.
The OECD publication explains that “international and national mergers are driven by the same general set of industrial considerations, but there are nevertheless certain differences in emphasis depending on whether the merger involves firms from different countries. International mergers arise partly because markets are still segmented and the acquisition of a local firm afford the quickest access to the foreign market. Domestic mergers are more likely to be driven by the desire to achieve economies of scale, although even national markets may also be segmented to some degree. As global integration continues, industrial consolidation will gradually become more important than geographical diversification, even for international mergers”.
Thus, against a trend to faster concentration of transnational capital, the pattern of foreign investment changes to follow the trend. Table 1 gives some useful indicators.
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TABLE 1. TOTAL INFLOWS, BY HOST REGION/COUNTRY
in US$ millions and percentage
Region/country 1984-1989 1990-1995
Total in US$ million 692,220 1,278,237
TOTAL WORLD (%) 100 100
DEVELOPED COUNTRIES 81 68
European Union 33 40
Other Western Europe 2 2
Canada 4 3
United Sates 38 19
Other developed cts. 4 5
(Japan 0.1 0.6)
DEVELOPING COUNTRIES 19 30
Africa 2.4 1.7
North Africa 1.1 0.7
Other Africa 1.3 1.0
Latin America and the Carib. 6.7 8.9
South America 2.9 4.6
Argentina 0.6 1.6
Brazil 1.2 1.0
Chile 0.5 0.6
Colombia 0.5 0.4
C. America & the C. 3.8 4.3
Bermuda 1.0 1.2
Mexico 2.1 2.4
Developing Europe** 0.0 0.1
Asia 10.0 19.4
West Asia 1.5 1.1
Central Asia* – 0.1
South, East, & S.E.Asia 8.5 18.2
China 2.0 9.2
Hong Kong 1.2 0.8
Indonesia 0.4 1.0
Korea, South 0.5 0.4
Malaysia 0.7 2.1
Singapore 1.9 2.2
Taiwan 0.6 0.6
Thailand 0.6 0.9
The Pacific 0.1 0.1
CENTRAL AND EASTERN EUROPE 0.05 2.3
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* Former bureaucratic socialist countries
** Bosnia and Herzegovina, Croatia, Malta, Slovenia, TFYR Macedonia, and former Yugoslavia.
Source: World Investment Report 1996. Investment, Trade and International Policy Arrangements, UN, 1996
Data processed by Dr. Robinson Rojas.
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TABLE 2.- 14 LESS DEVELOPED COUNTRIES. SHARE OF TOTAL
FOREIGN DIRECT INVESTMENT (%)
Country WORLD = 100 LESS DEVELOPED COUNTRIES = 100
1984-1989 1990-1995 1984-1989 1990-1995
Argentina 0.6 1.6 2.9 5.1
Brazil 1.2 1.0 6.4 3.5
Chile 0.5 0.6 2.8 2.1
Colombia 0.5 0.4 2.5 1.4
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SUB-TOTAL 2.8 3.6 14.6 12.1
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Bermuda 1.0 1.2 5.2 4.0
Mexico 2.1 2.4 11.0 8.1
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SUB-TOTAL 3.1 3.6 16.2 12.1
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China 2.0 9.2 10.6 30.6
Hong Kong 1.2 0.8 6.4 2.6
Indonesia 0.4 1.0 1.8 3.4
Korea, South 0.5 0.4 2.7 1.5
Malaysia 0.7 2.1 3.6 6.9
Singapore 1.9 2.2 10.1 7.5
Taiwan 0.6 0.6 3.1 1.9
Thailand 0.6 0.9 3.0 2.9
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SUB-TOTAL 7.9 17.2 41.0 57.3
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GRAND TOTAL 13.8 24.4 71.8 81.5
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source: World Investment Report 1996, UN, 1996
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Table 1 indicates that industrialized countries direct investment in less developed societies are concentrating on three regions, but with very asymmetric emphasis. Latin America and the Caribbean increased its share from 6.75 to 8.9%, while Central and Eastern Europe accounted for 2.3% of world inflows in the 1990s as against a meagre 0.5% in the 1980s.
Of course, the most dramatic growth ocurred in Sout, South East and East Asia, which rocketed from 8.5% to 18.2% of world direct investment. Within the region, China was the individual country with the highest increase, from 2.0% to 9.2%.
Africa saw its share shrinking to 1.7% from 2.4%, while, among the industrialized countries the European Union also was a ‘most preferred’ are for transnational capital attention, increasing its share from 33% to 40%.
Within less developed countries, the 14 ‘most invested’ (see Table 2) reached a 24.4% of world total as against only 13.8 in the 1980s. This spectacular growth was totally due to the Asian countries jumping from a share of 7.9% to a share of 17.2, of which more than half is accounted for by China.
One indicator of how concentrated are direct investment by transnational corporations in less developed societies is captured in Table 2 columns 3 and 4, which show than investment in the “great 8 of Asia” shot up to 57.3% of total investment in less developed societies from 41%. For the ‘14 most invested countries’, the share grew from 71.8% to 81.5%.
Thus, when we think “globalization” reaching less developed societies we must not forget that only 14 countries out of almost 200, are receiving about 82% of the financial globalization.
THE TRIAD MOVES AHEAD
In the new carving of planet earth in spheres of economic, political and cultural spheres of influence, the 1990s did show a very clear pattern with the members of the Triad making sure effective financial control over their sections of the world production they dominate.
From OECD, International Direct Investment Statistics Yearbook, OECD,
1997, the following appears:
US DIRECT INVESTMENT IN ASIA, LATIN AMERICA AND EASTERN EUROPE
1985 1995
Latin America -1000 11500
Asia 200 8250
Eastern Europe 0 1750
JAPANESE DIRECT INVESTMENT IN ASIA, LATIN AMERICA AND EASTERN EUROPE
1985 1995
China 100 4600
Other emerging Asia 1200 8000
Latin America 200 2200 (peak 1988 -3300)
Central and Eastern Europe 100 100
EUROPEAN UNION DIRECT INVESTMENT IN ASIA, LATIN AMERICA AND E. EUROPE
1985 1995
Central and Eastern Europe 100 7750
Emerging Asia 750 5000
Latin America 600 5400
To complete the picture, the following data is focused on each region:
FDI OUTFLOWS TO EMERGING ASIA BY PRINCIPAL OECD INVESTOR
Cummulative 1985-1996 (per cent)
Japan 50%
United States 31%
European Union 19%
FDI OUTFLOWS TO LATIN AMERICA BY PRINCIPAL OECD INVESTOR
Cummulative 1985-1996 (per cent)
United States 61.5%
European Union 27.8%
Japan 10.7%
FDI OUTFLOWS TO EASTERN EUROPE BY PRINCIPAL OECD INVESTOR
Cummulative 1985-1996 (per cent)
European Union 79%
United States 18%
Japan 3%
BUSINESS CYCLES AND FLOWS OF TRANSNATIONAL CAPITAL
One main item of propaganda about transnational corporation capital is that it contribute to economic growth. Even more, transnational capital is an engine of growth.
World Investment Report 1993, UN, 1993, concludes:
“The growth of FDI outflows is closely correlated with the growth of output. In short, and not surprisingly, the decision by TNCs to invest abroad is affected by cyclical fluctuations in economic growth (business cycles), both at home and abroad. The impact of business cycles on global FDI flows operates through the interactions between home and host-country economic conditions. This is partly owing to the fact that,as regards the supply-side of FDI, the foreign investment decisions of TNCs are affected by the availability of investible funds from corporate profits or loans, which are themselves affected by conditions at home. However, demand-side factors also play their part: growing markets abroad can give TNCs an impetus to invest, especially if domestic conditions are deteriorating. Indeed, growing foreign markets may be particularly attractive for TNCs based in countries experiencing a cyclical downturn. In 1991, these factors helped to raise the share of developing countries in total inflows; it rose to 25 per cent from an average of 17 per cent during 1985-1990″. (We know, from Table 1 that that share rose even more in the period 1990-1995 to 30%).
The most important finding of this United Nations’ study is that FDI ‘follow economic growth in the host country’ and there are no indicators signalling that FDI ‘fosters economic growth’
The study adds: “the growth of the world economy after the recession of the early 1980s appears to have stimulated FDI flows WITH A TIME-LAG OF ABOUT TWO YEARS. Similarly, the downturn beginning in 1989-1990 led to a decline in world-wide FDI flows starting in 1991. Business cycles may also induce growth rates of different countries to diverge more by affecting some countries more severely than others. The cyclical downturn that began in 1989 is one such example: GDP growth in the early1990s in developing countries was significantly higher than in developed countries, and the difference between their growth rates is expected to increase substantially. This suggests that business cycles, to the extent that they cause a greater divergence between the growth rates of developed and developing countries than would otherwise have taken place, have stimulated flows of FDI to the latter” (ibid, p. 94)
Data gathered by UNCTAD, Programme on Transnational Corporations, 1993, show that foreign direct investment inflows to ‘developed countries’ went up from about US$ 10bn (1980 prices) in 1970 to about US$ 50bn, at the same time that the rate of growth of real gross domestic product went down from around 4% to 2%. Between 1984 and 1990, the rate of growth decreased to 2% from almost 5% in 1984, and, foreign direct investment increased from about US$ 40bn to around US$ 180bn.
By and large, those FDI appear more slowing down than speeding up economic growth in developing countries, which, of course, is consistent with classical economic theory which states that monopoly/oligopoly capital slows down rate of growth of the industry.
For the whole period 1970-1990 in developed countries FDI grew from US$ 10bn to US$ 180bn while rate of growth decreased from 4% to 2%.
The same study by UNCTAD shows for less developed countries the following:
Rate of growth 1970-1981 = from almost 10% to 3%
FDI flows 1970-1981 = from US$ 2bn to US$ 18bn
Rate of growth 1981-1985 = from 3% to 5%
FDI flows 1981-1985 = from US$ 18bn to US$12bn
Rate of growth 1985-1991 = from 5% to 3.7%
FDI flows 1985-1991 = from US$ 12bn to US$ 38bn
REINVESTED EARNINGS AND RATES OF PROFITS
Another important issue related to FDI is that they “add” enormous sums of fresh capital to already capital-starved less developed economies.
UN, 1993 argues that “in terms of inflows, reinvested earnings are a considerably larger component of FDI in developing countries than in developed countries. ( between 40-20% for less developed countries and 20 to -20% for developed countries). In the latter group, inward FDI is financed overwhelmingly from funds brought in from abroad, whereas in developing countries, FDI depends more on profits earned there. It is not clear whether that contrast is due to the difference in profits earned in two regions or to different rates of profits
repatriation, dependent, among other things, on policies of host countries. If majority-owned foreign affiliates of non-bank United States parent firms are any guide, they earned much higher profit rates in developing countries: 8 per cent in the period 1983-1990, compared with 5 per cent in developed countries (United Sates Department of Commerce- profit rates are defined here as the share of net income to total income)”.
Nothing wrong with reinvested earnings when profits on those reinvested earnings are not going to leave the country. But, if those reinvested earnings, which were domestically produced, are seen legally as foreign investment, what happens is that domestic capital will flow abroad towards the home country of the investor. For less developed societies it will mean that domestic capital from poor countries will flow towards rich countries.
In normal business conditions, with 10% depreciation, 10% profits and 50% of reinvested earnings, in 10 years the host country will be treating as foreign capital an amount which is 50% national capital. The following data could be illustrative:
UNITED STATES.- Investment and income on investment abroad (US$ million)
Income on U.S. U.S. direct of which net direct
assets abroad investment reinv. invest.
abroad earnings abroad
1960 3,621 -2,940 -1,226 -1,674
1965 5,506 -5,011 -1,543 -3,468
1970 8,169 -7,590 -3,177 -4,413
1972 10,949 -7,747 -4,532 -3,215
1973 16,542 -11,353 -8,158 -3,195
1974 19,157 -9,052 -7,777 -1,275
1975 16,595 -14,244 -8,048 -6,196
1976 18,999 -11,949 -7,696 -4,253
1977 19,673 -11,890 -6,396 -5,494
1978 24,458 -16,056 -11,343 -4,713
1979 38,183 -25,222 -18,965 -6,257
1980 37,150 -19,238 -17,017 -2,221
1981 32,549 -8,691 -12,978 +4,287
1982 21,381 +2,369
1983 20,499 -373
1984 21,509 -3,858
1985 34,320 -14,065
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source: U.S. Bureau of Economic Analysis, Survey of Current Business,
June 1982, Table 1466.
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Summarizing:
-transnational capital, thorough merging and acquisitions, is becoming
more concentrated, more monopolic capital, in the 1990s
-transnational capital is strenghtening its grip on spheres of
influence, following the pattern known as The Triad
-transnational capital is not playing the role of engine of growth
but rather of engines to suck capital from the host economies
-transnational capital is slowing down rates of growth in both developed and developing countries.
ARE CLUSTERS AGAINST STANDARD ECONOMIC THEORY?
UNCTAD is very clear about regional investment clusters, and particularly about the continuing pattern of clustering of host countries in a region around a single home Triad member located in the same region.
UNCTAD adds: “According to theory, clustering is unlikely to occur: the distribution of foreign direct investment should reflect the location advantages of host countries, rather than their geographical proximity to a home country. While geographical factors are certainly important, other location advantages include the host country’s natural endowments, its infrastructure and human resources, as well as those aspects of its policy environment which impact foreign direct investment.”