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Nation-States and the Multinational Corporation

Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment

Nathan M. Jensen
Copyright Date: 2006
Pages: 216
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  • Book Info
    Nation-States and the Multinational Corporation
    Book Description:

    What makes a country attractive to foreign investors? To what extent do conditions of governance and politics matter? This book provides the most systematic exploration to date of these crucial questions at the nexus of politics and economics. Using quantitative data and interviews with investment promotion agencies, investment location consultants, political risk insurers, and decision makers at multinational corporations, Nathan Jensen arrives at a surprising conclusion: Countries may be competing for international capital, but government fiscal policy--both taxation and spending--has little impact on multinationals' investment decisions.

    Although government policy has a limited ability to determine patterns of foreign direct investment (FDI) inflows, political institutions are central to explaining why some countries are more successful in attracting international capital. First, democratic institutions lower political risks for multinational corporations. Indeed, they lead to massive amounts of foreign direct investment. Second, politically federal institutions, in contrast to fiscally federal institutions, lower political risks for multinationals and allow host countries to attract higher levels of FDI inflows. Third, the International Monetary Fund, often cited as a catalyst for promoting foreign investment, actually deters multinationals from investment in countries under IMF programs. Even after controlling for the factors that lead countries to seek IMF support, IMF agreements are associated with much lower levels of FDI inflows.

    eISBN: 978-1-4008-3737-3
    Subjects: Economics, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Illustrations
    (pp. ix-x)
  4. Preface
    (pp. xi-xiv)
  5. List of Abbreviations
    (pp. xv-xviii)
  6. 1 Introduction
    (pp. 1-22)

    Multinational corporations (MNCs) play a critical role in the global economy. By most estimates, production by multinational enterprises now accounts for over one-fourth of the worldʹs output and one-third of world trade. Moreover, many scholars believe that the investments of multinationals, commonly known as foreign direct investment (FDI), have beneficial effects on economic growth, transferring technology and managerial expertise as well as providing capital.

    A rich literature exists on firm-level decisions about FDI, but much less rigorous attention has been devoted to the national level. Why do certain countries attract multinational firms? Conventional wisdom holds that nations woo multinationals by...

  7. 2 Multinational Firms and Domestic Governments
    (pp. 23-39)

    This book focuses on one of the most stable and economically important of the international capital flows, foreign direct investment (FDI).¹ These private capital flows are investments from a parent firm to a location outside of the parent firmʹs host nation; they consist of equity capital, intercompany debt, and reinvested earnings. An investment becomes a foreigndirectinvestment, as opposed to portfolio investment, if it gives the parent firm some amount of control over the management of the enterprise, usually over 10 percent of the firm.² Companies use FDI, unlike portfolio investments, over long time horizons and generally not for...

  8. 3 Theory
    (pp. 40-52)

    Ireland, the Celtic Tiger, has harnessed massive amounts of foreign direct investment in recent years. By providing generous tax rates and substantial tax incentives, Ireland has propelled itself from one of the least developed nations in the European Union to one of the most dynamic economies in the world. At the same time, Finland, an example of a social democratic government with strong environmental regulations, strong unions, and less generous tax policies, has consistently ranked as one of the best environments for multinational corporations. Two countries with very different types of policies toward multinationals are perceived as hospitable environments for...

  9. 4 The Race to the Bottom Thesis and FDI
    (pp. 53-71)

    Tax policy is at the forefront of debates on attracting mobile capital. For example, Finland, long considered one of the most hospitable environments for FDI, recently proposed cutting its corporate tax rates from 29 percent to 26 percent in response to the perceived losses of FDI to lower tax Estonia.¹ Other Western European countries have simultaneously proposed domestic tax and labor market reforms and called for an end to ʺharmful tax competition,ʺ whereas low tax countries such as Ireland have attracted massive FDI inflows, at the expense of other European Union members.

    In the United States, the issue of outward...

  10. 5 Democracy and FDI
    (pp. 72-99)

    Canadian-based Alcan Corporation is arguably the largest aluminum manufacturer in the world, with 2002 revenues topping $12.5 billion and business operations in more than forty-one countries.¹ Many of these operations entail a massive fixed investment, such as their bauxite and alumina facilities in West Africa and Australia, and aluminum smelting facilities in Canada, the United Kingdom, Iceland, and Brazil with time horizons of fifty to sixty years.² Many of these production processes are extremely energy intensive, where the company often invests in power facilities, generating over 60 percent of their own power for their smelting operations. In countries where it...

  11. 6 Veto Players and FDI
    (pp. 100-128)

    In 1997, Alabama won a bidding war among thirty other U.S. states for a $300 million Mercedes-Benz production facility in Tuscaloosa. The negotiated entry deal included a $250 million incentive package that amounted to a transfer of $168,000 per job created. While it is unclear what impact this production facility has had on the Alabama economy, the production facility has been a success for the firm and the company has invested in a $600 million expansion that will add an additional two thousand jobs.¹

    A similar situation arose in Brazil, where Ford and General Motors (GM) chose Rio Grande do...

  12. 7 The IMF and FDI Inflows
    (pp. 129-145)

    In the previous two chapters I explored how domestic political institutions affect FDI inflows. I argue that political institutions that provide an appropriate degree of credibility to multinational investors and still maintain policy flexibility are preferred by multinational investors. Countries with these political institutions attract higher levels of FDI inflows.

    This study of the influence of political institutions on FDI inflows need not be limited to domestic institutions. International institutions, specifically the International Monetary Fund, could theoretically provide this same mix of both policy credibility and policy flexibility that multinationals prefer.

    In this chapter I examine the link between IMF...

  13. 8 Conclusion
    (pp. 146-156)

    This book focuses on the economic, political, and policy factors that influence foreign direct investment across countries. Understanding these determinants of FDI provides important insights into how countries attract capital flows that have become associated with higher levels of economic growth, employment creation, and technology transfer. As countries in the developed and developing world embrace foreign investment promotion strategies as part of a larger strategy of macroeconomic development, an understanding of the determinants of FDI inflows holds important academic and public policy ramifications.

    These capital flows also serve as a barometer of firmsʹ perceptions of domestic governmentsʹ policies and institutions....

  14. Notes
    (pp. 157-166)
  15. References
    (pp. 167-184)
  16. Index
    (pp. 185-193)