The Role of Multinational Enterprises and FDI Inflows in Transition Economies.
Corresponding Author:
Dr. Aristidis Bitzenis
Lecturer
City Liberal Studies, Affiliated Institution of the University of Sheffield
13, Tsimiski Str., 546 24 Thessaloniki, Greece
Tel. +30 2310 224.186, 275.575 Fax. +30 2310 287.564
E-mail:
and
Dr. John Marangos
Associate Professor
Department of Economics
Colorado State University
1771 Campus Delivery
Fort Collins, CO 80523-1771
The Role of Multinational Enterprises and FDI Inflows in Transition Economies.
ABSTRACT
The aim of this paper is to investigate the policies implemented by transition economies to become part of the “globalized” world; thus “transition” is a misnomer, “integration” would seem more appropriate. The transition process had the aim to develop an environment conducive to the free, less costly and easier penetration by MNEs. The transition process involved the integration of localized cultures, domestic entrepreneurship, business and legal institutions, communities, governments, resources and the political environment into the international political economy. The IMF and World Bank enforced shock therapy policies to ensure that these economies are integrated in the globalized world.
1. INTRODUCTION
The transition process had the aim to develop an environment conducive to the free, less costly and easier penetration by multinational enterprises (MNEs). The transition process involved the integration of localized cultures, domestic entrepreneurship, business and legal institutions, communities, governments, resources and the political environment into the international political economy. In this context, the International Monetary Fund and World Bank also contributed to the integration of transition economies by enforcing shock therapy policies upon transition economies through conditionality. The shock therapy policies ensured that these economies are integrated in the globalised world. The aim of this paper is to investigate the policies implemented by transition economies to become part of the “globalized” world; thus “transition” is a misnomer, “integration” would seem more appropriate.
2. GLOBALIZATION, REGIONALISATION AND CONCENTRATION OF FDI.
Globalisation is mainly used to describe the increase in international trade and financial flows that have taken place since 1960, but more in the post-1980 period. Globalization is a term used to express the tendency of the world economy to integrate, not only in respect to cross-country trade and investments, but also in regard to the harmonization of laws and regulations of economic activity. The core of the concept of globalization is that the world tends to become one entity. Globalization in its economic form envisages an interdependent world economic system dominated by MNEs not identified with any individual country.
A mapping of FDI inflows indicates the extent to which host countries are integrating into the globalised world economy and the distribution of benefits of FDI. According to theWorld Investment Report (2001, p.4-5) through the comparison of the world’s FDI maps we can conclude that in the year 2000 more than 50 countries (24 of which are developing countries) have an inward stock of more than $10 billion compared with only 17 countries 15 years ago (7 of them developing countries). However, FDI is unevenly distributed. The world’s top 30 host countries account for 90-95% of total world FDI inflows/stocks. The top 30 home countries account for around 99% of outward FDI flows and stocks, mainly industrialized countries.
Globalization is not a new phenomenon, but it is just a new episode, something that is much more pervasive, deeper, and different from past episodes. For example, in 1914, at the end of a previous phase of globalization, west European foreign investment was more globally oriented before the First World War than in the 1990s (UN/ECE (2000, p.7-8). Thus, in the current globalisation phase, the world is more integrated than ever, since more countries participate in the globalised system, more countries open their borders and receive FDI flows. However, the distribution of FDI is unequal since a small number of countries are receiving the majority of FDI and trade flows. Cavallari (2004, p.175) argues that in developed and developing countries, globalization has resulted in increasing foreign direct investment as the share of cross-border capital flows is increasing, increasingin this way to the role of MNEs.
The pervasiveness of the current form of globalisation has much to do with the liberalization of trade, the expansion of FDI and the emergence of massive cross-border financial flows. This has resulted in increased competition in global markets that has come through the combined effect of two underlying factors: policy decisions to reduce national barriers to international economic transactions and the impact of new technology. The growth of the services sectors, especially those services dealing with the knowledge and the information, and the rapid growth of a new generation of technology are the most important factors directly connected and supported the latest globalisation phase. These features, which were absent in the previous phase, make globalization an established, unstoppable and irreversible process. The economies that lag in adopting the new technologies cannot participate in the globalisation or are in transition to a market economy as a result they lag in economic development and in living standards. Compared to the fact that countries with high level of economic development are either free-open economies or earlier adopters of the transition reforms. These developments have created the enabling conditions for the onset of globalisation.
Globalisation today is perhaps the most usually connected with the rise and power of MNEs. Kessler (2000) warned that there are powerful minorities on the global scale that seek to take full advantage of the global market economy. This can be supported with the fact that in the certain parts of the world there are many that do not shy away from claiming monopoly over globalisation benefits. These forces consider globalisation as an exclusive privilege for the elite or the dominant superpower, the United States of America. Thus, “Westernisation” may be an alternative term to globalisation. What is perceived as globalization may be interpreted under the scope of the intense influence of the Western civilization, culture and economic style on the rest of the world. The dominant concept is that the Western way of life and economic activity is the most developed and the more appropriate one. This is combined with the tendency of the less developed and developing countries to ‘look up’ to the Western model, disguised the overwhelming persistence of western countries to their culture, at the expense of the rest of the world in the form of globalization. The rapid development in technology, especially in communication related technology, that is usually produced and mainly consumed in Western countries has underlined the domination of Westernisation.
There is an essential bound between the liberalization of the FDI paths and competition policy. According to UN (2001) liberalization of the FDI paths may mean promotion of competition among companies, but on the other hand, ensuring the benefits of the FDI liberalization, there should be reduction in the statutory obstacles as well as merger-review system. This was adopted in 1980 by the United Nations when they established the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices. Post World War II financial markets according the Keynesian view, were too unstable and enraged the state in economic affairs. By the 1970s these assumptions were opposed by neoliberalism which believed that monetarism and structural policy should be pursued, financial markets liberalized and there should be free international capital with the purpose of diminishing the role of the state.
The major evidence of the inefficiency of the regulation by the governments was the collapse of economies which were under totalitarian regimes. Regarding the emerging and transition markets, the most important issue is the taxation of the capital flow. EBRD (2001) argued that the augmented gap between increased mobility of people and capital on the one hand, and the jurisdiction that regulates them, on the other hand, can be a problem when realizing the gains from globalization. Efficient supervision and regulatory regime is required so as to achieve the gains from the movement of people and trade. Apocada (2002, p.892) mentioned that supporters of economic globalisation argue that FDI is a catalyst for economic development because of the transfer of technology, know-how, and access to export markets. In actual fact, technology, know-how, management and liquidity-related advantages could now be exploited to prevail over the inherent disadvantages of FDI (Pitelis, 1996, p.193). Furthermore, FDI benefits economic growth, capital accumulation, encourages transfer of technology, and increases the human capital. The study of Apodaca (2002) is restricted to the region of East and Southeast Asia (for 11 counties, from 1990 to 1996) but the evidence provided by Apocada is very important. Apocada (2002, p. 904) found that FDI is the only globalisation variable that promotes every aspect of human and economic development in Asia. Apodaca findings were that in the case of East and Southeast Asia, the state continues to be a factor that had positive impact on the meeting social, economic, and political needs and requirements of the people in this region, because the state securing human rights and protecting its citizens from the adverse effects of the globalization. In addition, FDI were beneficial both for the state and for the poor countries in this region. Lastly, he suggests that if western governments want to encourage development abroad, they should pursue trade and FDI rather than financial aid. Aggarwal (2001) agreed with EBRD (2001) and suggested that for an economy to have well-functioning capital market, it is essential to adopt a strong legal and regulatory framework. In addition, it is important not just to adopt them, but to implement them too, something which the emerging and transition markets failed to do.
The most important institution which played a significant role in a global regulatory structure is the International Organization of Securities Commission (IOSCO). However, each country has to adopt such regulations that best suit its market. According to Obstfeld and Taylor (2002), after the Second World War, the global economy changed its overview. In 1960, taking into consideration the uprising trend of the world trade, the capital moved across national borders. Still, at the beginning of the twenty first century, the financial integration of the economies was disregarded and not considered at all. The financial crises as those in Latin America (1994-1995), in South East Asia (1997), in Russia (1997-1998), in Turkey (2000-1), and in Argentina (2001-2002) questioned the benefits of the free financial integration and the regulations. Those who believe in free trade and capital movement without regulations and restrictions argued that the net benefits make losers and winners all around. But these crises showed that nearly everyone becomes a loser in such a world.Hence, UN/ECE (2000) argued that although some countries experienced certain benefits in the wave of liberalization, their empirical evidence has proved that higher capital movements were associated with lower growth rates, inefficient resource allocation and not equal allocation of income per head. During 1980s and 1990s, the liberalization of the capital flow across borders was accompanied by increased volatility of the financial markets. Many emerging and transition markets still control the FDI flow, which can help them at the same time to protect themselves from the crisis in other emerging markets. Much empirical evidence has shown that currently developed countries such as Western Europe, North America would not have achieved the present development level, had there not been active government policies. As regards the liberal trading system policy, the most important issue is to maintain confidence in certain rules by applying them properly and equally to the developed countries (UN/ECE, 2000; Aggarwal, 2001; EBRD, 2001).
As a conclusion, Fortanier (2001) stressed that the increased liberalization, debilitated trade barriers, investments and financial support reforms, privatization, regulatory reforms, all these factors contributed to a considerable growth of international investments over the past decades. Furthermore, regulatory reforms and harmonization of European legislation merge with liberalized internal market thus leading to intensified intra European investments and trade patterns. In addition, NAFTA, Asia(ASEAN4), Africa (SADC6), Australia and New Zealand (ANZCERTA) applied regional integration systems in order to liberalize trade as well as investments paths. Currently, bilateral investment treaties are an important factor for promotion and protection of investments flows which legally provide security for the investors (Fortanier, 2001). Many bilateral investment agreements were concluded aiming at protection and increment of the FDI flow in 1990; hence many governments tried to facilitate the FDI flows. In 1997 there were 1330 bilateral investment agreements in 162 countries. The most important fact is that these numbers are going up every year. In 1980s and 1990s, many countries from Central and Eastern Europe concluded bilateral regional agreements, a lot more among themselves as well as with the developed and developing countries. Brewer et al (1997) argued that there is an increased use of incentives by national and sub-national governments in the newly most competitive than ever worldwide environment under the globalization and new regionalism pressures. A broader use of incentives is the exploit of the international investment multilateral agreements (regional initiatives) by foreign investors. Those agreements produce welfare gains, influence legal framework, boost economic growth, increase the number of potential consumers, increase opportunities for market growth and provide stability, peace, unity and prosperity. MNEs tried to enter into markets, which have established regional agreements not only bilateral, but also multilateral (e.g. CEFTA, SECI, BSEC, CEI, SEECP, etc.). Moreover, Floyd (2001) wondered if we have a situation of globalisation in the strictest sense or according to the recent developments in the business environment we have more a case of regionalisation or Europeanisation. And Floyd concluded that if we used an interdisciplinary approach we could deduce that this is not globalization rather it is regionalisation or Europeanisation
Also, in 1980s many bilateral regional agreements were finalized among some developing countries such as China, Chile, Algeria and the Republic of Korea. Latin America and the Caribbean have only recently commenced implementing these agreements (UNCTAD, 1997). Bilateral and regional agreements were concluded in order to be improved the investments conditions which at the same time improve the relationship between the triad members (UNCTAD, 2003). Moreover, their analysis confirms the fact that high economic integration and low national responsiveness which explain a globalization process will not be a fruitful strategy. The most recent example is the Japanese MNE which faced devastating results (UNCTAD, 1997). Bilateral and regional agreements were concluded in order to improve the investments conditions which, in return, improve the relationship between the triad members (UNCTAD, 2003).
MNEs from different countries, in order to achieve their goals, often contract the so called cross-border agreements as a complement to the traditional FDI activities. The analysis showed that the number of these agreements has permanently been increasing (UNCTAD, 1997). As per the empirical evidence, during a five-year period starting from 1990, most cross-border agreements were concluded within the TRIAD members: EU (40% of those firms), US (80%) and the Japanese firms (38%). Further on, much as the developing countries participate less in the total number of contracted agreements, the numbers indicate increment in this respect, as from 1990 the percentage has gone up from 27% to 35% (UNCTAD, 1997). At the end of 2000 the number of these agreements quadrupled (Fortanier, 2001).Privatization, as Fortanier (2001) stress, is one of the chief factors that lead to reforms in liberalization and regulations. Crucial factors that lead to privatization are inefficient performance of state owned corporations and need for competition in order to improve the competitive and investment climate; this, in particular, applies for the transition countries. In the course of 17 years, starting from 1985, the FDI flow was highly concentrated within Triad (EU, ASEAN and NAFTA). The outward stock worldwide was 80% and the world inward stock 50-60%, concentrated within Triad primarily. The most important factors that caused world market to spread are government regulations and differences among cultures. There are three regional blocks nowadays: NAFTA, the European Union, and ASEAN. Rugman (2003) mentioned that a powerful indicator of triad/regional economic activity is the concentration of the world’s largest MNEs in the TRIAD. In 2000, of the world’s largest 500 MNEs, 430 were in TRIAD. These 500 MNEs account for over 90% of the world’s stock of FDI and nearly 50% of the world trade. There are many regulatory obstacles regarding the FDI flow.