6:22 AM Jul 20, 1993


Geneva 20 July (Chakravarthi Raghavan) -- The "universe" of the Transnational Corporations (TNCs) is large, diverse and expanding, facilitated by national and international policy frameworks expanding their rights, but with no corresponding obligations on them.

This is brought out in the World Investment Report, 1993 published by the United Conference on Trade and Development (UNCTAD), which under UN secretariat restructuring resulted in the transfer to the UNCTAD secretariat of the Programme on Transnational Corporations, formerly UNCTC (UN Centre for Transnational Corporations).

And while over the last two years there has been a recent dip in the volume of FDI follows, "there are solid reasons to predict a major increase of FDI in coming years, particularly to developing countries," according to Carlos Fortin, Deputy to the UNCTAD Secretary-general.

The TNCs and their activities are advancing the economic integration of the global economy on a scale and at a pace that is unprecedented. While at regional levels TNCs were integrating the economies through, at a global level and inter-regional level it is their FDI activities in goods and services that is pushing global integration.

The issues arising from the ascendancy of TNCs, Fortin added, deserve as much attention from national policy makers as those stemming from a more open trading system.

Though in 1991 and in 1992, there has been an overall decline in world-wide flows of Foreign Direct Investment (FDI), the continuing growth of FDI and the expanding role of the "universe of TNCs" is being facilitated by developments at the international policy framework such as the World Bank Guidelines on Treatment of FDI which call for fair and equitable treatment, national treatment and most-favoured-nation treatment for FDI, the report says.

The Uruguay Round of trade negotiations, when concluded, will also increase the rights of TNCs and their efforts to pursue integrated international production and distribution of goods and services.

However, there are no corresponding obligations on the TNCs and "policy and regulatory frameworks need to adapt to the emerging integrated international production system, if the benefits of regionalization and globalization are to be spread as widely as possible," UNCTAD Secretary-General Kenneth Dadzie comments in a preface to the report.

At the multilateral level, the World Bank guidelines on treatment of FDI contain prescriptions to governments of host countries on how they should treat private FDI but "they do not deal with the obligations of foreign investors, except in very general ways", the report points out.

The prolonged efforts at evolving at the UN a Code of Conduct for TNCs has made little progress. After informal consultations in July 1992, delegations have concluded that no consensus was possible on the draft code and they favoured a fresh approach including preparation of guidelines and/or any other instruments.

"This brings to a formal end the most comprehensive effort to create a global and balanced framework for FDI," the report says.

By early 1990s, there were an estimated 37,000 TNCs -- 24,000 of them based in 14 major industrialized countries -- in the world, with over 170,000 foreign affiliates, with evolving global strategies and changing organizational structures.

The stock of FDI in foreign countries had reached some two trillion dollars in 1992 and TNCs generated approximately 5.5 trillion in worldwide sales in 1990. This compared with the annual four trillion dollars in exports of goods and non-factor services, of which one-third was in intra-firm trade.

These figures do not reflect the number of firms that carry on transnational activities and, with little or no FDI, exert control over foreign productive assets through a variety of non-equity arrangements -- subcontracting, franchising, licensing etc -- as well as through strategic alliances. Though no figures are available, strategic alliances are estimated to number in the thousands and subcontracting in their hundreds of thousands.

There is also a high concentration in terms of foreign assets controlled by the large firms -- with roughly one percent of parent TNCs owning over half of the FDI stock or total affiliate assets.

TNCs from developing countries accounted for about eight percent of all TNCs and for an estimated FDI stock of $110 billion, or five percent of the global stock of the FDI, by the late 1980s. FDI from developing countries account for five percent of the inward FDI in the developed countries.

While global FDI flows declined or have stagnated in the 1990s, that into developing countries continued to flow, with reinvested earnings forming a considerably larger component than in developed countries where inward FDI is financed overwhelmingly by funds from abroad.

It is not clear whether this contrast is due to differences in profits earned in the two regions or different rates of profit repatriation. But if majority-owned foreign affiliates of US firms be any guide, these firms earned much higher profit in the developing countries -- eight percent over the period 1983-1990, compared to five percent in developed countries.

In 1991, developing countries received $39 billion or over 25 percent of all inflows, increasing even further in 1992 to an estimated $40 billion. While all parts of the developing world benefited, there was continuance of strong growth of FDI flows into East, South and South-East Asia, and a substantial increase in flows to Latin America and the Caribbean.

FDI flows to Africa increased to $2.5 billion in 1991, but the bulk of it was to the oil-exporting countries and some sharp rise in inflows to Morocco which enjoys duty-free access to the EC.

Privatization policies in developing countries are increasing opportunities for FDI throughout the developing countries. The report however says that a comprehensive picture of TNC participation in worldwide privatization is difficult to obtain, though it appears strongest in western Europe and Latin America, often through joint ventures with domestic firms. In central and eastern Europe, where markets are close by, the TNCs have taken a prominent and often a strategic role.

"It would be wrong, however, to rule out a possible reversal of this trend," the report warns.

"As the influence of short-term imperatives recedes, the desire of governments to regain grater control over decision-making could return. This is particularly likely if economic growth remains weak, fDI proves a disappointment in transferring technology and skills or if world markets are closed by protectionism".

Worlwide flows of FDI declined in 1991 for the first time since 1982 and totalled $180 billion, down from over $230 billion in 1990. Preliminary estimates for 1992 show that world-wide outflows, including total outflows from the five major sources of FDI (US, UK, Germany, Japan and France) have declined further.

TNCs in the primary sector are still among the largest of all. Taking all resource-based activities (primary sector, plus food, drink, tobacco and paper), they account for one-quarter of the largest 100 TNCs.

In contrast, TNCs in services are noticeably absent from that list. The smaller size of services-sector TNCs indicate the limited scale of economies in many business services and more restrictive FDI regulations in many capital-intensive services.

Also, size on its own does not automatically transfer into jobs. Measured by employment, the weight of the primary sector TNCs in the 100 largest TNCs is significantly reduced, reflecting the capital-intensity of their activities.

And despite the labour-intensive nature of many service companies, FDI in services does not create more employment than FDI in other sectors. But service affiliates have a skill level closer to that of their parents and, on average, higher than in manufacturing or primary sectors.

The nature of TNC linkages with the global economy also differs across sectors.

Since goods are tradable, and many services are not, service companies and their foreign affiliates are not big exporters. Also, both primary and manufacturing sector activities are better suited to intra-firm division of labour. While service firms can build transnational networks among their affiliates, they cannot split their activities in the same way as their industrial counter-parts. Consequently intra-firm trade in services sector is considerable lower than in manufacturing.

The report draws attention to the public policy implications of the increasing globalization of TNC and points out that the emergence of an integrated international production system is beginning to strain traditional concepts and approaches.

The classical notions and norms about corporate nationality, separate corporate personality and arms-length dealings between the principal and the subsidiary and questions of jurisdiction of the host and home states on a variety of issues including taxing etc are all being strained by the new linkages, strategies and roles of the TNCs.

From a legal and public policy view, specific tasks are the responsibility of particular units of the TNC system and involve a division of labour between foreign affiliates and their parent firms and among foreign affiliates. The economic autonomy of each constituent unit has now declined and it is increasingly difficult to distinguish between parent firms and affiliates.

In view of these, the report suggests, some of the traditional concepts need to be re-examined.

The report flags, in the light of gradually emerging international framework for FDI, the issue whether international incorporation could be an answer to the complexity of these problems.

However, in a world of nation-states, even one with globalized TNCs and integrated economy, the notion of nationality for individuals and corporations would not disappear easily. But its consequences could become less important, with 'national treatment' (as between foreign and domestic capital) more common, even with variations.

The report refers to the parent-affiliate dichotomy, and the inadequacies of the current legal doctrine of piercing the corporate veil to fix responsibility, and suggests concepts like fixing on a parent the "duty-to-manage responsibility" or legal duty of the parent to manage the affairs of its affiliates in accordance with some standard of responsible international investment and management.

The setting of such standards could best be done through an international convention.

Another would be to apply the group liability concepts being used in the US, where the corporate veil for liability of individual entities is ignored once a common ownership, direction and unity of economic purpose and operation is established.

Any proposal for change, the report argues, would have to deal not just with whether a single economic entity really exists but also consider the extent to which the TNCs themselves would benefit from new legal concepts.

Now TNCs have to judge when courts in different countries would impose liability on the parent company. With a more consistent body of law they can make better judgements.

Any change must also be influenced by the objective of different areas of law. A wholesale change in law could do great disservice to the issue of corporate liability. In practice the law cannot deal with problems in terms of a universal conceptualized doctrine, but by separate determination of what best serves its particular objective.

The report suggests that countries already experimenting with aspects of enterprise law and group liability should cooperate in areas of law where some uniformity was possible -- such as a common approach to anti-trust measures, disclosure of information, common accounting principles and regulations for environmental protection.

The growth of integrated production and activities of TNCs and the growing share of international activities in the total output of firms has also brought up the problems of tax policy and tax liabilities.

Conventional approaches and double-taxation avoidance treaties based on cross-border trade between unrelated parties no longer seem to serve the cases involving TNCs. It has become necessary to adapt ways of allocating and taxing TNC income to take account of growing integration of international production, the report says.

While it was easy for a government to assume it was competing against other governments for a share of TNC tax revenues, this would be a superficial view. "All governments would gain if their tax authorities were to pool the information on TNC costs, prices and profits."

In particular taxing policies would need to consider improving methods for allocation of income and profits through "arms-length standards"; where arms-length method may be difficult, to choose alternative methods such as profit-split method or some pre-agreed formula; use of unitary approaches, which might be more in tune with economic realities; and use of advance pricing agreements.

It might also be useful to strengthen international cooperation, improve mechanisms and procedures for mutual agreement among tax authorities and improving information and accounting systems.

In terms of policies to promote FDI and investment, the report underlines that with more and more countries promoting inward flows of FDI, the old ideas of offering best incentives no longer suffice.

With FDI policy regimes converging across countries, the remaining differences in these regimes exercise less and less influence on corporate investment decisions. Governments, particularly of developing countries, have hence to play an active role in improving their economies as FDI locations and focus on national enabling framework -- sound macro-economic policy, credible development strategy, social policies that contribute to political stability, and investments and development of physical infrastructure in education, training and health.

"An efficient private sector is unlikely without an efficient public sector. Public institutions supporting the functioning of markets or rewarding entrepreneurial activities have to be restructure according to modern organizational and management practices, with governments ushering in modern accounting practices, develop and deepen capital markets including an efficient banking system and encourage an appropriate range of business services, and development of external linkages within the economy.