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
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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