A political scientist and Global Fellow studies how multinational corporations make decisions that affect developing countries.
Nathan Jensen, assistant professor of political science at Washington University in St. Louis and a 2005–06 Global Fellow at UCLA, taught advanced undergraduate courses this fall on multinational corporations and international political economy. He estimates that his UCLA students had experience in or ties to perhaps 60 countries, adding an "exciting dimension" to the classes.
Jensen spoke with the International Institute about his research on multinational corporations and their decision-making processes. As part of that project, he has interviewed officials at firms such as Intel Corp. of Costa Rica and Vietnam, L.L. Bean Inc. of Costa Rica, Pepsi Co. of Vietnam, and Alcan Inc. of Brazil.
The first part is a big question. In political science and economics, people usually focus on—although it's quite broad—the mobility of capital, labor, and goods. Which is to say international finance, trade, and migration patterns.
My focus is on the movement of capital across borders, specifically the investments of multinational corporations. I'm interested in, first of all, how multinationals make decisions. Beyond economic factors, there's actually quite a lot of evidence that political factors really have a big impact on multinationals' investment and operation decisions.
The secondary part is how these decisions interact with domestic politics, affecting either the government or workers. Although I do some work on advanced industrialized economies—I have some interest in outsourcing and tax laws among the rich countries—most of my research really does focus on emerging markets, on the developing countries of the world.
The big broad question is, how do multinationals contribute to either development or problems with development?
There's a real growing consensus that attracting investment by multinationals is probably one of the most important development strategies.
The problem is the historical record is a bit mixed on whether these multinationals really have a major positive impact. In some cases they have very little impact, or an impact on just one group in society, or just one part of the country—or, in some cases, a negative impact.
My take is that there's lots of potential for multinationals to have a positive impact on development, but I think the governments' strategies are actually quite important. Good policies can be magnified by multinationals, and so can bad policies. Talking very generally, when coupled with foreign investment, certain sets of domestic policies can actually contribute to underdevelopment, harm the welfare of workers, and damage the environment.
One example is a liberalization of the economy where you allow private foreign investment and build the right regulatory regimes at the same time, so that you limit monopolies and forms of entry that decrease competition.
Whereas if you allow private investment without some of these oversight mechanisms, you can have a quite negative impact. A number of studies have documented when multinationals have positive and negative impacts, and quite often it has less to do with the exact operations of multinationals and a lot more to do with the incentives that governments set up. Governments that give multinationals a monopoly of a certain market often find multinationals have a negative impact.
Yeah, multinationals are quite complicated. I think sometimes on the right they have this perspective that multinationals are the most efficient enterprises, and they enter markets in ways that improve competition, economic growth, and wages. There are a lot of instances where that's not the case. And then you have criticisms from the left saying that multinationals are the cause or the problem with underdevelopment. And I think that this is a lot more nuanced.
One set of articles that I've worked on recently is focusing on the theory of multinationals' decision-making. If you look into the theory, the investment decisions of multinationals are quite complicated, and they're not dominated by any one specific set of policies.
So right now, the state of California is talking about providing tax incentives for movie production to stay in Los Angeles. Some of that is in response to movie production moving to other states, but there's also some arguments that it's moving to Canada or other countries that provide tax incentives. This is plausible—that these tax incentives are the marginal decision that affects the choice of location. But from what we know from the literature on the theory of multinational decision-making and also empirical evidence, tax rates are a very minor factor for the decision of where multinationals invest.
I think this is important not just for academic research but for public policy. We have a number of tax wars across U.S. states, but also among national governments, both in the developed and developing countries: lowering tax rates to limit outsourcing or to increase foreign investment. And it's not necessarily clear that that's always a good strategy.
Finland consistently ranks very high as one of the best business environments, and at least in the past they had very high tax rates. But they used these tax rates to fund really good infrastructure, high levels of education. So there are some good arguments that actually higher-tax economies in certain circumstances can provide the public goods that multinationals want. So I think taxes are one of the biggest misconceptions, in terms of how they impact multinationals.
I'm thinking of looking into some of the details on how the film industry makes location decisions, and it's not clear to me that these decisions are really dominated by taxes. There are arguments that clusters are important: that it makes sense to keep a lot of the production in Los Angeles, because you have all of the other institutions, or the other sets of talent that you need to have movies shot here. There are other cases where you want to use Rome as the backdrop in your movie, and, regardless of what the tax rates are, you might locate in Rome.
I'm sure there are some sets of multinationals that could move anywhere—or in this case, the film industry could shoot anywhere—and these might be the cases where they're really sensitive to taxes. But there are other factors you can't ignore. So, if you're building automobile production, you might build one in China because of low tax rates, but you might be building in China because that's the only way to enter the market, because of the barriers to trading automobiles, or it might be because of higher levels of education and low wages.
This is why I'm housed in political science. The assumption that you usually start with is that policy-makers are self-interested, and that they're passing through legislation or proposing policies that will help them get reelected. So I think there's a very fair argument that governments will pass these policies possibly to reward their core constituencies, who might be more important to them than other sets of voters.
I actually have a working paper on this with a co-author, looking at tax competition in the world. We find that governments of the right are much more likely to respond with lower taxes when their neighboring countries lower taxes, where governments of the left are much more likely to hold tax rates steady. Which maybe isn't a surprise, but it's quite interesting that exactly in times when you think that competition is forcing all governments to do the same thing, to lower tax rates, you actually see a big divergence in what the left and right are doing.
Personally, I think it's really plausible that these arguments of globalization could be just veneers for the same sort of policies that you'd have otherwise. What surprised me in this last election is that the issue of outsourcing was so important, and you see not only the Republican party quite often proposing lower rates of corporate taxation across the board, across all time periods, but you actually have the Democratic Party—one of John Kerry's proposals was a reduction in tax rates to limit outsourcing. At least in the U.S. you actually see this convergence of both parties talking about lower tax rates.
One thing that makes foreign direct investment quite different from other types of investment is that it's long-term. For example, the aluminum manufacturers: if Alcoa or Alcan builds a production facility somewhere, its life-span is going to be 60 years.
So a lot of the factors that are quite important for multinationals are long-term factors. And these could be geographical location—in some cases, it's actually the language of workers, so that Ireland gets a lot of outsourcing of services because English is spoken, or India. This is one of the reasons why we see outsourcing of call services to India and not to China. But what I think is interesting is that these long-term factors that are quite difficult for governments to vary—the level of education takes decades—are some of the really important factors for attracting investment.
And a lot of the smaller policy decisions that governments make have quite marginal impacts, which puts politicians who are trying to win reelection in pretty difficult situations. What can you do in the next four years to help the state of Alabama or the state of Mississippi to become more competitive? Well, improve the education system, build better infrastructure, and these things take decades.
And for developing countries, quite often there's political risk: risk of contract disputes, risk of a dispute going to the judiciary and of some kind of outcome from the judiciary that's unfair to the multinational. Reducing these risks, once again, requires institutions that are quite sticky and quite difficult to build. This is probably where the big positive impact is. These are things developing countries could do—stabilizing exchange rates, building independent central banks. They could improve on the rule of law by building domestic institutions. These are things that political scientists aren't always clear how developing countries could even build. But it looks like these are the things that really matter, not little marginal decisions like tax rates.
I think in political science and economics we really do focus on globalization being an exchange of capital, usually capital and goods: trade, finance. Sometimes we throw immigration into that camp.
The idea of trade in ideas, the spread of ideas across countries, is something that I think has always been in the back of my mind as being really important, but I think it becomes even more obvious in a group like this. And it's something that I've thought about in terms of these policies, in terms of tax competition for multinationals.
And it could honestly be this exchange of ideas across countries—this belief that this set of policies is the perfect set of policies—that might explain the tax wars and the spread of tax incentives for multinationals more than any of the other things.
Published: Monday, January 09, 2006
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