Imperialism in the Twenty-First Century. John Smith
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transnational corporations are “enterprises comprising parent enterprises and their foreign affiliates,”1 in other words, enterprises that indulge in FDI. According to this definition Tesco and Walmart only count as TNCs to the extent that they operate retail outlets in other countries—Walmart’s 2.1 million global workforce (up from 2,600 in 1971) does not include any of the workers who produce the goods that fill its shelves.2 Until the first decade of the twenty-first century, both mainstream and Marxist analysts tended, as William Milberg observed, “to see globalization through a foreign direct investment lens. Like the proverbial drunk who searches for his lost keys under the streetlight only because that is where he can see best, economists have overemphasized the relevance of foreign direct investment.”3 The rapid growth of arm’s-length outsourcing has made this approach increasingly anachronistic, and has also stimulated the rise of value-chain analysis and related approaches that see in-house FDI and arm’s-length contractual relations as two different types of links comprising global value chains. Similar considerations have led many analysts to propose a fundamental change to the definition of transnational corporation, which, instead of denoting a firm with wholly or partly owned subsidiaries in other countries, should be redefined as “a firm that has the power to coordinate and control operations in more than one country, even if it does not own them.”4
UNCTAD’s World Investment Report 2011 is a watershed in research into arm’s-length, contractual relationships, defining these as
a cross-border nonequity mode of TNC operation [in which] a TNC externalizes part of its operations to a host-country-based partner firm in which it has no ownership stake, while maintaining a level of control over the operation by contractually specifying the way it is to be conducted…. the defining feature of cross-border NEMs, as a form of governance of a TNC’s global value chain, is control over a host-country business entity by means other than equity holdings.5
The differences and commonality between these two forms of outsourcing can be seen with the help of a thought experiment. A TNC can, and often does, convert a direct in-house relation with a subsidiary into an arm’s-length relation with an independent supplier simply by signing some legal documents, erecting new signage, opening up a new bank account—without making any changes to the work regimes or to the labor processes, or to the price of inputs, or to the profits realized upon the sale of the output. The actual process of production and value creation/extraction would then be identical in every respect. Nothing would change except titles of ownership. Yet surface appearances would show a profound change: a visible South-North flow of repatriated profits from subsidiary to HQ would vanish without trace, even if the new arrangement turned out to be more effective in squeezing production costs and boosting the HQ’s profits. As we saw in the case of the three global commodities in chapter 1, in the arm’s-length relationship all of the lead firm’s profits appear to arise as a result of its own value-added activities in the countries where the commodities are consumed, while their suppliers and the super-exploited workers employed by them make no contribution whatsoever.
This chapter examines these two forms of the outsourcing relationship, first separately and then together, in order to further enrich our concept of the globalization of production, and in order to identify questions and paradoxes that both mainstream and heterodox approaches cannot explain.
FOREIGN DIRECT INVESTMENT
According to the internationally accepted UN definition, “FDI is made to establish a lasting interest in or effective management control over an enterprise in another country…. As a guideline, the IMF suggests that investments should account for at least 10 percent of voting stock to be counted as FDI.”6 However, the contrast between portfolio and FDI investment is not as clear-cut as this excerpt from the standard UN definition of FDI suggests. As Ricardo Hausmann and Eduardo Fernández-Arias note, “FDI is not bolted down, machines are. If a foreigner buys a machine and gives it as a capital contribution (FDI) to a local company, the machine may be bolted down. But the company’s treasurer can use the machine as collateral to get a local bank loan and take money out of the country.”7 This is not the only way that financial imperatives can override the production relation—retained profits may be reinvested in domestic government debt or other financial assets; alternatively, repatriated profits may exceed the affiliate’s earnings, signifying disinvestment.
FDI can be categorized into four different types according to the motive of the investor. “Efficiency-seeking” FDI is neoliberalism’s paradigmatic form—efficiency means cutting costs, in particular the cost of labor—and is the prime concern of this study. “Market-seeking” FDI was the dominant form in the years before neoliberal globalization, when protectionist barriers obliged TNCs to move production close to markets, and it is still important, as in the example of Japanese- and European-owned car plants in the United States. In contrast to efficiency-seeking FDI, market-seeking FDI typically does not involve the fragmentation of production processes but their replication in the host country. Since the most important markets for final goods are in the imperialist nations, market-seeking FDI is dominated by cross-border investments between imperialist countries—or, as a study by three UNCTAD economists put it, “Trade based on horizontal international production sharing occurs mainly between developed countries.”8
“Resource-seeking” FDI refers primarily to foreign investment in the extractive industries (hydrocarbons and minerals), but natural resources can include foodstuffs, ingredients of cosmetics, and much else. When these are not merely harvested or extracted but have first to be cultivated, they are regarded as agricultural products, not natural resources. Agriculture and natural resource extraction have important features in common: FDI in these sectors is primarily determined by the location of mineral, hydrocarbon deposits, and the like, or of fertile tracts of land, in contrast to efficiency-seeking production outsourcing, whose location is primarily determined by the location of pools of cheap, super-exploitable labor. To resource-seeking FDI the availability of low-wage labor is an added bonus. The shift from in-house to arm’s-length production arrangements is much less evident in extractive industries, because the collection of rents from rich deposits of ore or oil are much easier to protect when the lead firm directly owns the resources and the means of their extraction. The two forms of TNC exploitation of low-wage labor seen in manufacturing industry—in-house and arm’s length—are also evident in agriculture. Nestlé’s 800,000 contract farmers display many similarities to the arm’s-length relations in manufacturing value chains; while, in contrast, plantation capitalism in old and new forms correspond to FDI, in that they involve direct ownership of capital in the low-wage economy. Finally, “technology-seeking” FDI seeks access to scientific or technological knowledge available in the host location. This is rarely an important motive for FDI flows into poor countries.
Until the first decade of the new millennium, it was a widespread, almost universal view that FDI in developing nations was of peripheral importance to rich-nation TNCs. Thus David Held, the social democratic visionary, argued that “the vast majority of … FDI flows originate within, and move among, OECD countries.”9 Kavaljit Singh, writing from a radical-reformist perspective representative of many NGO critics of globalization, concurs: “The bulk of global FDI inflows move largely within the developed world…. This situation could be aptly described as investment by a developed country TNC in another developed country. The U.S. and the EU … continue to be the major recipients of FDI inflows.”10 Sam Ashman and Alex Callinicos, writing in the Marxist journal Historical Materialism, similarly conclude that “the transnational corporations that dominate global capitalism tend to concentrate their investment (and trade) in the advanced economies…. Capital continues largely to shun the Global South.”11 Chris Harman, like Ashman and Callinicos, a partisan of the “International Socialist Tradition,” draws out the big implication of this: if N-S FDI is so weak, so too must N-S exploitation be: “Whatever may have been the case a century ago, it makes no sense to see the advanced countries as ‘parasitic,’ living off the former colonial world…. The centres of exploitation, as indicated by the FDI figures, are where industry already exists.”12 Alex Callinicos, writing in 2009, similarly argued that data on FDI flows “are