Reference no: EM133051593

The Growing Power of Multinational Corporatio Steve Kapfer and Dr.

Brian Champion, Political Science and World Politics Librarian

One of the most important issues states face is the growing power of the multinational corporation. Multinational corporations (MNC) have an immense influence in the international system, participating in the majority of economic activity and growth. It is therefore important to understand the effect that multinational corporations have on international relations to correctly identify why particular events happen. If policy is made without an accurate understanding of the international system then chances are that it will cause more harm than good.

We look at different theories about companies to understand how MNCs are eroding state power and we seek to explain why MNCs are so efficient in allocating scarce resources in the name of maximizing profits or returns to shareholders. Profit maximization is necessary for any firm to be successful in a competitive market. Firms exist, then, because they can efficiently allocate scarce resources in a way that is profit maximizing. Therefore, MNCs exist because they can efficiently allocate scarce resources on a global scale. This ability is called 'operating flexibility'. Operating flexibility adds value to a firm because it allows a firm to exercise a variety of different options due to three conditions: uncertainty, time dependence, and discretion. Multinational corporations capitalize on uncertainties, such as volatile exchange rates, take advantage of time dependence by investing in two plants in different geographical locations, and create managerial discretion by instituting beneficial managerial practices.

One of the options that arises from operating flexibility is managerial discretion. To fully utilize managerial discretion firms must have some kind of 'know-how' that allows them to operate efficiently. Firms produce and internalize 'know-how' that is not transferrable or replicated by other firms to gain a competitive edge over other competing firms. By creating new knowledge, and coding it in a way that is easily replicated within the firm, firms can expand their market.

Clearly, multinational corporations gain much of their power from their ability to operate efficiently, coordinate, and manage transactions between states. In the name of efficiency MNCs can and will shift production from states with high costs to states with low costs. States, then, should be concerned with the power that MNCs have because of their ability to determine employment and, ultimately, the prosperity of the state. After all, the only thing more alarming to a state than the presence of a MNC is its absence.
Political action by MNCs also allows MNCs to minimize the extent to which governments can regulate MNCs by taking advantage of legislative processes that are often easily manipulated. For example, states create property rights for individuals and groups to protect parties from injuring each other's property. Individuals and groups (including foreign and domestic firms) constantly vie for more protection and freer access to resources. Successful firms are then able to manipulate legislation, raising the "transaction costs of others" which allows them to "exploit the ensuing rents".

MNC have created an "international organization" that can have an immense effect on not only the economy, but on a state's government as well. For example, 51 of the world's hundred largest economic entities are corporations and not countries, and "the 500 largest corporations account for 70 percent of world trade". Corporations not only have the political power to influence states, but also the economic clout to devastatingly affect a state's economy should the state try to oppose a multinational corporation. As a result, states feel unable to formulate effective economic strategies or to plan for the future.

Despite the erosion of state power by multinational corporations, and the fact that they can act independently of states, states still seem to be dominant over MNCs. After all, states still have the right to give legitimacy and to take it away. It is therefore necessary that states remind corporations of this power, forcing MNCs to constantly stand on hostile ground.

Conflicts between MNCs and states will inevitably occur because the multinational corporation is a "modern concept evolved to meet the requirements of the modern age" while the state is "still rooted in archaic concepts unsympathetic to the needs of our complex world." States with strong national pride will take serious offense to the growing amount of foreign direct investment and the cultural erosion that usually accompanies it. States that try to resist free trade and complete integration into the world economy will encounter economic stagnation, leading to a decline in development. States must, then, develop the necessary institutions and legislation to control the influence of MNCs while still encouraging foreign direct investment.

-What are the three conditions which allow Operating Flexibility to add value to the firm?

-How are MNCs growing in power, i.e., MNCs having more power than states (states = countries)?

-What are the risks to countries, economies, other businesses and consumers? 

-What can "states" do keep MNCs in-check (i.e., How can states keep control)?

-What do you think about the idea of a "Corporatocracy" (economic and political system controlled by corporations or corporate interests)?