Chapter 7

The Uneasy Relationship between TNCs and

States:Dynamics of Conflict and

Collaboration

Review• Concepts to Review

– TNCs and GPNs– Role of states in globalization– Embeddedness

• Key Words:– TNC/state relationships; locational

flexibility; taxation and regulation of TNCs; integration and fragmentation; host country tactics

TNCs and States• States and firms need each other• Fragmentation of GPNs has become common

– states tend to be fearful about stability of TNC branches, leakage of tax revenues, and TNCs having moving out of the country.

• It seems logical that TNCs would want the removal of all regulatory barriers; however, regulatory structures are an opportunity, stimulating competitive bidding

• Relationship between states and TNCs is dynamic

• Locational mobility

TNCs and Home/Host Countries

• Home countries– Some states view TNCs as extensions of state foreign policy – TNCs look to home-country governments to provide protection

abroad – TNCs incorporate parts of national economies– Home-country trade policies can open up access to markets in

foreign countries

• Host countries– Have the power to limit or dismantle TNC manufacturing and

trade networks with regulations and restrictions– Ultimate sanction: to exclude or appropriate a particular

investment– After the initial investment has been made, balance of

bargaining power shifts from TNCs to host country• Though this is limited in areas where technological change is

frequent and/or global integration of operations is common

TNCs and Institutions• Taxation

– Lower taxes for TNCs are often an incentive for location

– Problematic issue: how a TNC’s internal transactions are taxed

– The ability to set internal prices enables TNC to adjust transfer prices; it can be hard for governments to document the actual extent of this.

– The greater the differences in corporate taxes, duties, tariffs, exchange rates, the greater is the incentive for TNCs to manipulate internal transfer prices

• Regulation– No comparable body to the WTO for regulating TNCs– History of attempts to introduce international framework

relating to FDI/TNCs– Main problem is the conflict of interest between TNCs,

states, labour groups and CSOs

Embedding TNCs• TNCs wish to maximize locational flexibility

to take advantages of differences between countries

• Primary aim of a host state is to try to embed a TNC as strongly as possible

• Two types of embeddedness:– Active embeddedness is when a TNC seeks out an

asset and voluntarily incorporates it into its operations

– Obligated embeddedness occurs when there is a localized asset which is important to a TNC and access to it is controlled by the state

• The scarcer the resource, the greater the bargaining power of its controller and vice versa