TNCs and Underdevelopment: A Comment on Firebaugh Volker Bornschier and Christopher Chase-Dunn Bornschier: Sociology Institute, University of Zurich, Ramistrasse 69, 8001 Zurich, Switzerland Chase-Dunn: Sociology, Johns Hopkins University, Baltimore, MD. 21218 USA October 30, 1992 TNCs and Underdevelopment: Comments on Glenn Firebaugh's, "Growth Effects of Foreign and Domestic Investment", in the AJS, 98 (1), July 1992: 105-30. Glenn Firebaugh's article debates the short-term and long-term developmental effects of transnational corporations (TNCs) in peripheral countries. While he agrees with previous findings that foreign investment spurs growth, he rejects the earlier conclusion for the long run, i.e., that a strong position of TNCs in a peripheral host country has disadvantageous effect on development. In order to demonstrate that earlier findings of negative long-term effects have been misinterpreted he performs reanalyses. Reanalyses are very valuable. The theoretical argument about short and long-term effects was tested by an innovative design on the operational level in the 1970s. This test design, published first in the AJS in 1978, improved the independent, but similar, approaches of Stoneman (1975) in Britain, Chase-Dunn (1975) in the U.S. and Bornschier (1975) in Switzerland. The then innovative test design has shortcomings, since over a comparatively short period both short-term and long-term effects are difficult to disentangle. Firebaugh points to such shortcomings without really overcoming them in his reanalysis. This because a necessary improvement would have been to expand the time period under study, to gather fresher data and improve the existing ones. Instead he simply relied on the data compendium of 1979 which included for the first time rough estimates of capital stocks. The focus of his reanalysis is the Bornschier/Chase-Dunn (1985) book. Although published in 1985, that book summarizes the knowledge and data of the pioneering studies of the 1970's. Almost two decades later Firebaugh has regrettably foregone the possibility to improve the test design by extending the time period under study in order to contribute to a clarification of what is under dispute, i.e. the long-term effect of TNCs on development in the periphery. Our comments will address two issues: (i) the theoretical argument underlying the hypotheses under dispute and a critique of Firebaugh's vacuous theoretical concepts, and (ii) the question of whether or not the findings reported by Firebaugh contradict our earlier conclusions. I Firebaugh's theoretical discussion is poor and can hardly compete with standards of economic sociology in the field. It is quite misleading to reduce the questions of TNCs' development effects simply to "foreign investment". This is what Firebaugh does. Transnational corporations represent an important institution in the world economy (Bornschier and Stamm, 1990). This was the starting point of the pioneering studies which addressed the problem from a world system perspective. Certainly, most of TNCs' business is in core countries, i.e., on the average about 75%. While peripheral countries are marginal for most TNCs, their presence and penetration in the periphery is very important for these countries. For example, in many peripheral countries between 60 and 75% of the largest industrial enterprises are controlled by TNCs, and their foreign subsidiaries are active in highly concentrated industries which they normally dominate. The question then becomes important whether TNCs as an institution act in favor of closing the development gap or whether their hierarchical organizational structures overarching the world economy are an element contributing to reproduce the core-periphery stratification in the world. Our contributions argued that the latter is the case and that this is due to the logic of TNCs in an unequal world. We give a brief example of the complex interaction of TNCs as an institution with peripheral societies. This is to show that the issue (i) cannot simply be reduced to foreign as compared to domestic investment and (ii) that pointing to weak linkage effects of TNCs in peripheral host countries is not sufficient to evaluate development effects. A case in point - although not the only one - is the worldwide resource transfer within TNCs, i.e., their redistributive economy. In doing normal business these organizations have various means of collecting resources from penetrated countries: profits, management fees as well as those for services and licensing of property rights, administered prices for the transfer of goods and services. Such exchanges within the worldwide operating corporations completely by-pass what is called the "market". In general, intermediate goods and intellectual property (such as patents) are overpriced to the disadvantage of LDCs. This does not necessarily stem from an intention on the part of the TNCs to exploit the penetrated country. Rather, it follows from the logic of TNCs in an unequal world. One example of this logic is that subsidiaries have to contribute to overall costs even if these costs do not arise within the subsidiary in question. The task of central management, finance, strategic planning and innovation are located in those countries where the TNCs maintain their headquarters, with obvious effects on occupational structures. The headquarters are the places where the resources flow in. There the decisions are taken how and where to reinvest the resources worldwide. This means rational, optimizing behavior which is profitable for the headquarters, but not necessarily the best way to support sustained development at the periphery. By means of transfers to the headquarters, the customers of TNCs in peripheral countries and the peripheral state (via taxing and borrowing for infrastructure and subsidies which make business profitable) thus pay in our example also for the organizational superstructure for TNC business without receiving corresponding employment benefits and without being able to direct future investments of the resources over which TNCs command. This is an example of one of the mechanisms by which TNCs help to reproduce the spatial-economic hierarchy in the world economy. The core specializes in the control of capital and technology, in the manufacture of the most advanced and sophisticated industrial products and in the provision of elaborate services - embodying much knowledge. The periphery, with its different gradations, is engaged in more routinized production, destined either for the domestic or the world market. We do, of course, not claim that it is impossible for a country to rise in the spatial-economic hierarchy. But it is clearly more difficult when TNCs have penetrated a country to a large extent. To give an idea why we expect this let us briefly point to the problem of monopoly (in a generic sense). TNCs are normally big, if not huge, companies operating in highly concentrated branches and thus transfer the problem of monopoly. This becomes a problem for development. Due to monopoly, tendencies towards stagnation appear already at the early stage of industrial development in a peripheral country. After an initial spurt, monopolization is likely to severely hamper further development. As a result of the redistributive character of their business (as illustrated above) TNCs show little inclination to invest monopolistic profits in the host country, especially when the unequal distribution of income has led to early saturation of the peripheral market. Although peripheral countries provide additional profitability for TNCs, they do not offer attractive opportunities for innovation and diversification which would be an escape from the perils of monopolistic stagnation. These are but short remarks to suggest the arguments upon which our hypotheses of initial growth spurts and later unfavorable effects rested. WE wish to make clear that a simple contrast of foreign with domestic investment grossly oversimplifies the situation. Bornschier and Chase-Dunn (1985: 29ff) summarized their work of the 1970s as follows: "Following an initial growth spurt this will create an industrial structure in which monopoly is predominant, labor is insufficiently absorbed, and there is underutilization of the productive forces. Thus, the peripheral countries that adopt this path of uneven development based on income inequality and foreign capital imports will experience economic stagnation, under- and unemployment and increasing marginalization of the population (....) relative to countries that are less penetrated by transnational corporations and relative to the growth potential of the country." The emphasis in this argument is on a "path of uneven development". It implies a cumulation of decisions by locals and TNCs which create politico-economic structures with vested interests from which it is not so easy to escape. Therefore, in the long run countries in which TNCs have become dominant should perform less well. In terms of aggregate growth rates this will be masked as long as TNCs build up their position in a country and therefore fresh investment is flowing in - although we know that they often also expand their business by local borrowing or by acquiring equity in exchange for technology, which is normally exploited chiefly by their own subsidiaries. Obviously this long-run hypothesis needs to be tested by long time series, which were not available in the 1970s. Today it is much easier to confront these hypotheses with data. Firebaugh's most fundamental mistake is to confuse the "investment rate" -- the rate at which investment is flowing in to a country -- with the overall level of penetration by TNCs. The level of penetration is necessarily measured by comparing how much property is owned by foreign corporations with the overall size of the national economy. Thus a given amount of TNC ownership does not tell us how penetrated a country is. We must also know how large the national economy is. In early efforts to operationalize penetration the amount of TNC ownership (or various proxies) were weighted by the GNP of the country in order to produce an estimate of penetration. In the data source which Firebaugh uses the denominator had been improved by the substitution of an estimate of the domestic capital stock of the country for the GNP. It is these estimated figures of domestic capital stock that Firebaugh uses for his comparisons of the growth effects of foreign and domestic investment rates. Furthermore, we strongly reject Firebaugh's implicit assumption which treats the aggregate growth rate of a country as a sufficient indicator of development. Even the World Bank has now realized that development means more. In contrast to Firebaugh, we always referred to impacts on growth and its distribution. This allowed us to evaluate the distribution of gains from growth. There is a long list of findings and debate on the relationship between presence of TNCs and inequality. Our earlier findings (Chase-Dunn,1975; Bornschier and Ballmer-Cao, 1979) and those of several others show that high presence of TNCs goes together with substantially higher income inequality. No study has been able to demonstrate that TNCs improve the distribution of gains from economic growth. Finally we want to note that our theoretical arguments pointed out the complex interactions of the TNCs with the society, economy and the state of peripheral countries. This included also the study of economic policies which were triggered or suppressed by TNC presence (Bornschier, 1980). These brief comments should be enough to demonstrate that economic sociology cannot reduce the complex interactions between the system of TNCs and peripheral countries to vacuous terms like investment and average growth. These are the kind of economic constructs we should eschew in sociology, since they obscure much which is of central importance about the real world. II The second substantive comment addresses the question of whether or not Firebaugh's findings contradict our previous hypotheses. We admitted at the beginning that the original design has some shortcomings and that these can be improved. And we welcome attempts to do this. But Firebaugh's analysis is actually a step backward in many respects. Firebaugh repeatedly concludes from his reanalysis that "there is strong support for the view that foreign investment is not as good as domestic investment" (p.116). From this one must conclude that strong presence of TNCs in peripheral countries implies a disadvantage. Such a disadvantage - in principle - might be offset by other effects of TNCs which could be favorable. Is there evidence for such favorable effects? All we know from empirical studies is that high presence of TNCs tends to go together with rather - what we term for the sake of brevity - unfavorable characteristics of peripheral host countries. We mentioned only two but important aspects since they are part of the argument: higher income inequality and early tendency towards monopoly with restricted, structural characteristics of the penetrated country and the role of the state (for an early study see Bornschier and Ballmer-Cao, 1979). To our knowledge there exists no study that can demonstrate that heavy TNC presence has improved important conditions within peripheral countries that are relevant for a more even development. Now, if "investment" of TNCs performs less well than domestic investment and if the presence and control over the economy by TNCs has unfavorable side-effects with negative feedbacks for future development prospects, then over time their development impact becomes clearly problematic. The conclusion Firebaugh draws -- that "foreign investment benefits LDC's" -- is thus not warranted at all. Quite the contrary. But this is what Firebaugh is contesting. What was the conclusion a responsible scholar working in the 1970s would have drawn from the body of evidence available, then, to which unfortunately Firebaugh's reanalysis has added little? A responsible scholar would hardly have recommended a high reliance on TNCs for overcoming underdevelopment. This was the conclusion from the pioneering studies which used empirical information until the mid-1970s. "A high degree of penetration (control by transnational corporations) has a long-run retardant effect on economic growth and is associated with greater income inequality" (Bornschier and Chase-Dunn, 1985: xi). One and a half decades later, what can we say. Were these implicit recommendations wrong? Did peripheral countries which heavily relied on TNCs perform well or even better in the eighties? For sure, most peripheral countries were badly hit by the world economic crisis and the debt crisis. There were only a few countries in the periphery that could achieve real upward mobility with respect to the core/periphery hierarchy. Examples are South Korea and Taiwan. In both cases industrialization has been overwhelmingly directed by nationals and not by TNCs, and both performed markedly better with regard to income distribution than all comparable countries. On the contrary, especially Latin American countries performed very badly in terms of development (growth and distribution) and fell far back in the "lost decade" of the 1980s. Most of these countries are, and have long since been, heavily penetrated by TNCs. Examples are Brazil, where TNCs controlled already in the l970s 50% of the largest 173 industrial companies (a share that mounts to 72% among the very top) or Mexico, where TNCs controlled 61% of the hundred largest or Argentina with a share of 55%. It is sad to state that long-term development does not contradict the conclusions from the studies of the 1970s. As we have predicted already in the 1970s, TNCs are - due to their institutional logic which interferes with national development - no source of sustainable and equitable growth at the periphery. This became obvious in the 1980s when TNCs substantially reduced their fresh investment flows to the periphery. The UN Centre on Transnational Corporations (1988: 1) summarized this: "The expansion of the TNCs has occurred through the use of a wide variety of institutional arrangements, many of which involve little or not investment of capital. Indeed, as compared to the preceding two decades, there has been a marked slow- down in the growth rate of foreign direct investment. This decline in the expansion of international investment has affected particularly the developing countries, which have been experiencing their most severe economic difficulties since the 1930s." What is then on the research agenda for the 1990s? First, we need to take a fresh look at the really long-term effects of high TNC control in peripheral countries by covering recent periods when TNCs had built up important monopolistic positions in many of these countries. This requires new crossnational studies. Second, we need to examine possible changes in the organizational logic of TNCs themselves. Have their mechanisms of governance changed in important ways? Are future effects less likely to be disadvantageous or not? Third, how can unfavorable mechanisms be avoided or counteracted? We mentioned that the TNC as an institution, as it worked in the past, implied profound conflicts with the goal of "national" development. Reform could mean more than designing new national policies, since sustainable world development is the more urgent focus of the 1990's. Is there the possibility of reform? There are many obstacles. But we think that it is hardly in the long- term interest of a TNCs to do business in the stagnant and distorted context which now prevails in much of the periphery and semiperiphery. Notes References Bornschier, Volker 1975. "Abhaengige Industrialisierung und Einkommensentwicklung." Schweizerische Zeitschrift fuer Soziologie 1,1:67-105. Bornschier, Volker 1980. Multinationale Konzerne, Wirtschaftspolitik und nationale Entwicklung im Weltsystem. Frankfurt and New York: Campus Verlag. Bornschier, Volker, Christopher Chase-Dunn and Richard Rubinson, 1978. "Crossnational evidence of the effects of foreign investment and aid on economic growth and inequality: a survey of findings and a reanalysis." American Journal of Sociology 84,3:651-83. Bornschier, Volker and Thanh-Huyen Ballmer-Cao 1979. "Income inequality: a crossnational study of the relationship between MNC penetration, dimensions of the power structure and income distribution." American Sociological Review 44,3:487-506. 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