International production in a volatile regulatory environment: the influence of national regulatory policies on the spatial strategies of transnational corporations

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International Production in a Volatile Regulatory Environment: the Influence of National Regulatory Policies on the Spatial Strategies of Transnational Corporations

PETER

DICKEN,*

Manchester,

U.K.

In face of the globalising strategies of transnational corporations (TNCs) it has become conventional wisdom in some quarters to regard the nation-state as an increasing irrelevance. TNCs. it is often implied, slice their way at will through national boundaries, rendering virtually all state economic policies ineffective. Although there is a kernel of truth in this viewpoint, it is a gross misrepresentation of current reality. Differential state regulatory (and deregulatory) policies in the areas of trade, industry and foreign investment remain highly significant. They are exceptionally important to the strategic behaviour of TNCs which, of course, attempt to take advantage of national differences in regulatory regimes in their pursuit of global competitive advantage. The result is a dynamic bargaining process in which each party attempts to capture the greatest gains. Current developments in the international political economy, notably the strengthening of regional economic integration in Europe and North America and the continuing GATT negotiations. are transforming the geographical scale and nature of the ‘regulatory surface’ on which TNCs operate. In exploring the relationship between regulatory environments and TNC strategies examples will be drawn from a variety of sectors, including automobiles, electronics, textiles and clothing, and pharmaceuticals. Abstract:

1. Introduction In face of the globalising strategies of transnational corporations (TNCs) it has become conventional wisdom in some ‘quarters to regard the nation-state as increasingly irrelevant to economic activity at the global scale. TNCs. it is often implied, slice their way at will through national boundaries, rendering virtually all state economic policies ineffectual. Although there is a kernel of truth in this viewpoint it is a gross misrepresentation of current reality. In fact, there is a renewed recognition, among writers across

“School of Geography, University of Manchester, Road, Manchester Ml3 YPL, U.K.

a broad spectrum of ideological positions, that the state’s role, though much changed by the increasing complexity of both its internal and external relations, remains highly significant as one of the primary shapers of the global economy. For example, BINA and YAGHMAIAN (1991), CERNY (1991), PICCIOTTO (1991), PITELIS (1991) and POOLEY (1991) all eschew the notion that the nation-state is no longer a significant global actor. From a different perspective, PORTER (1990) argues strongly that the nation-state is an especially important ‘container’ of the various sources of corporate competitive advantage within the global economy. Differential state regulatory (and deregulatory) policies in the areas of trade, industry and foreign invest-

Oxford

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merit, therefore, remain highly significant. They are exceptionally important to the strategic behaviour of TNCs which, of course, attempt to take advantage of national

differences

in regulatory

pursuit of global competitive developments in the international

regimes

in their

advantage. Current political economy,

industry

cases to provide

23 Number

more concrete

3/1992

examples

of

the trends discussed in the main body of this paper. It is important to emphasis that this paper is not an attempt to provide a regulationist explanation of current developments. Although the kinds of concrete regulatory policy discussed are certainly part of

notably the strengthening of regional economic intergration in Europe and North America and the

the mode of social regulation and TNC strategies part of the regime of accumulation, development

continuing GATT negotiations in the Uruguay Round, are transforming the geographical scale and nature of the ‘regulatory surface’ on which TNCs

regulation theory at the international scale is, so far, very limited [see, for example, PECK and TICKELL

are of

(1992)].

operate.

The result

is a dynamic

bargaining

process

in which

each party attempts to capture the greatest gains. The notion that the changing structure of the global economy is the outcome of a complex combination of processes involving both TNCs and states is increasingly widely accepted across the political spectrum. Thus, GORDON (1988, p. 64) argues that “TNCs are neither all-powerful nor fully equipped to shape a new world economy by themselves” whilst OSTRY (1990, p. 1) asserts that “the international environment of the coming decades will be shaped not by governments or international institutions but by the interaction of the two main actors, governments and global corporations-especially in the Triad: the United

States,

Europe

and Japan”.

The purpose of this paper is to explore some aspects of this interaction from the perspective of the influence of national regulatory policies on the spatial strategies of TNCs. The discussion is divided into three sections. In Section 2, a general overview of regulation in the global economy is provided with particular reference to major types of regulatory activity and to significant recent developments in the regulatory environment, notably the increasing convergence of separate regulatory strands within a ‘strategic’ policy framework and the growing trend towards regional integration in the global economy. Section 3 focuses upon the interaction between states and TNCs as each strives to enhance its own competitive position in a volatile and increasingly competitive environment. It also examines trends in the strategic behaviour of TNCs and the diversification of modes of international involvement as companies strive to reconcile the tension between globalising and localising forces. Section 4 consists of some very brief

2. Regulatory

Structures

in the Global Economy

The regulatory environment facing TNCs is exceptionally complex both in terms of the kinds of activities under regulatory control and in terms of the geographical scale at which such regulatory structures operate. In this paper, attention is focused on three types of regulation: those relating to trade, foreign investment and industry-specific policies [see DICKEN (1992a, Chap. 6) for a detailed discussion of these policy areas]. With the exception of trade, which is the one area of the three to operate within an international regulatory framework (the GATT) the primary scale of operation is the nation-state. However, the recent trend towards the strengthening of regional economic groupings is introducing a new meso-level of regulation of profound significance for TNC activity. It is widely accepted that the mode of international economic regulation, and especially the general stability of that mode, is driven primarily by the existence of a hegemonic power which has the political and economic clout both to initiate, and to ensure the maintenance of, the regulatory mechanisms. The role of the United Kingdom and, subsequently, of the U.S. as the global hegemon has been extensively documented. Today, however, the U.S. hegemonic role has been eroded (GILPIN, 1987; KENNEDY, 1987; MacEWAN and TABB, 1989). We appear to be in a phase of transition to a multipolar economy captured, at lcast crudely, by OHMAE’s (1985) concept of the global triad. For the TNC, the two most critical aspects of state regulatory policy are, first, nccess to markets and/or resources (including human resources) and, second.

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for fn-ms operating

within particular

national (or supranational) jurisdictions. The primary regulatory mechanisms governing access to markets is, of course, trade policy. This is both the longest-standing mechanism of state regulation of international economic activity and also the only one which is set within an international institutional framework, the GATT. Currently, however, the entire GATT structure is itself in some confusion as the most comprehensive and ambitious GA?T negotiations

ever attempted-the

Uruguay

Round-are

meet

to filter out those investments national

of

access

to

markets

which do

whether

social or political. Foreign firms excluded entirely from particularly

economic,

may in fact be sensitive sectors

of the economy or the degree of foreign involvement may be restricted. The operations of those firms which have been allowed a physical presence may be regulated in a whole variety of ways including, in particular, the operation of local content requirements,

export

locally-derived regulation

objectives,

levels,

rules governing

the export

profits or capital and the levels and methods

in disarray. National

mechanisms not

via

imports-the traditional mode of entry before the deveIopment of direct presence by TNCs-is achieved through the use of either tariffs or nontariff barriers (NT&). Through the successive GATT rounds since the late 1940s the average tariff level has fallen dramatically, from an average of 40% in 1947 to around 5% today. This liberalisation of international trade, at least until the oil price shocks of the 197Os, coincided with, and contributed substantially towards, the remarkable growth of the world economy. In recent years, however, although tariff levels have continued to fall overall, NT3s have proliferated, both in the frequency with which they are being introduced and in their diversity of form. A plethora of import barriers ‘has been invented, the most important of which are the various forms of import quota (often euphemistically termed ‘voluntary’ export restraints). Governments have displayed considerable ingenuity in devising other more subtle, and often less transparent, trade restrictions. BHAGWATI (1988) divides such NTBs into two categories-‘high track’ and ‘low track’ restraintsaccording to their relationships with GATT rules. It has been estimated that NTBs now apply to more than a quarter of all industrialised country imports [see KOSTECKI (1987) for a detailed analysis covering the 1986-l 987 period]. In addition, there has been a surge in anti-dumping regulations by several states, notably Australia, the U.S., Canada and the European Community (EC). A second group of regulatory policies, those relating to inward foreign direct investment (FDI), are concerned with both access and rules of operation. In controlling access, that is regulating the entry of foreign firms, governments may operate screening

of

of taxing

profits.

In the case of foreign investment, there national body comparable to the GATT

is no interwhich pro-

vides a set of rules for international investment. The Uruguay Round negotiations do include attempts to establish a set of ‘trade-related investment measures’ (TRIMS). Major home countries of TNCs, notably the lJ .S., wish to prohibit or restrict such measures as local content rules and others which are believed to discriminate against foreign firms. The argument is that such measures distort or restrict trade. The opponents of TRIMS, particularly the developing countries, see such measures as essential elements of their economic development strategies. They, in turn, wish to see a tightening of the regulations against what they regard as the restrictive business practices of TNCs. Although few states operate a totally closed policy towards inward FDI, the actual degree of openness varies considerably. In general, developed market economies tend to be less restrictive in their policies towards foreign investment than developing market economies. One obvious reason is that the developed economies are the major sources of, as well as the dominant ~Iestin~~ti~~ns for, the world’s FDI. A third group of policies which directly or indirectly impinge upon the spatial strategies of TNCs are industry policies. Most governments have some kind of policy whose aim is to regulate and/or stimulate industrial activity within its jurisdiction and, therefore, to enhance its internationally competitive position. The tool box of industry policies is extremely diverse, ranging from the obvious one of financial and fiscal incentives, through state procurement policies, technology policies, policies to encourage industrial restructuring, to regulate mergers and influence

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industrial structure, to regulate and so on. The list of possibilities

the labour market, is very long indeed.

Such policies (some of which are specifically designed to stimulate industrial activity, others explicitly to regulate such activity) may be applied either generally across the whole of a nation’s commonly,

applied

of firm or designated

selectively

geographical

The specific policy mix adopted

industry

or, more

by specific sector,

type

area.

by a number

of significant variables including: the nation’s political and cultural complexion and the strength of institutions and interest groups; the size of the national economy, especially that of the domestic market; the nation’s resource endowment, both physical and human; the nation’s relative position in the global economy. JOHNSON (1982, pp. 19-20) draws a distinction between two different ‘ideal type’ models of state policy stance: A regulatory, or market-rational, state concerns itself with the forms and procedures--the rules, if you willof economic competition, but it does not concern itself with substantive matters. For example, the United States government has many regulations concerning the antitrust implications of the size of firms, but it does not concern itself with what industries ought to exist and what industries are no longer needed. The dcvelopmental, or plan-rational, state, by contrast has as its dominant features precisely the setting of such substantive social and economic goals The government will give greatest precedence to industrial policy, that is. to a concern with the structure of domestic industry and with promoting the structure that enhances the nation’s intcrnational competitiveness. The very existence of an industrial policy implies a strategic, or goal-oriented. approach to the economy. On the other hand, the market-rational state usually will not even have an industrial policy (or, at any rate, will not recognise it as such). Instead, both its domestic and foreign economic policy, including its trade policy, will stress rules and reciprocal concessions (although perhaps influenced by some goals that are not industrially specific, goals such as price stability or full employment). to find examples of developmental states in today’s world than of pure regulatory states, although countries like the U.S. and the United Kingdom are more regulatory than developmental in their current policy stances. But, certainly, virtually all the newly industrialising countries (NICs), including those in East and South East Asia, and, u fortiori, Japan itself, are undoubtedly developmental states. Despite some prevailing views to the contrary, there It is far

easier

3/1992

that the role of the state in the NICs has

been a central driving force in their economic development, although not in a uniform manner. Even though it may be more valid to see the developmental state and the market-rational/regulatory state as two types

at the far ends

nevertheless,

ideal

not unreasonable

the current

by a state will tend to

vary over time and also to be influenced

is no doubt

23 Number

economy between

politico-economic

of a continuum to interpret tensions

it is. many of

in the global

as being as least partly a reflection of a clash these two different models of state behav-

iour. Of course,

these three areas of regulatory

trade, FDI and industry policies-are set in totally separate boxes. Indeed,

activity-

not, in reality, the fundamental

feature of the developmental state is its use of all three policy strands as part of a developmental strategy. However, one of the most significant developments of the past few years is the growing demand within such market-rational states as the U.S. for a strategic policy stance. Rather misleadingly, the term used to express this orientation is ‘strategic trade policy’ (STP). But, by definition, STP involves far more than just trade policy. In the U.S. case, for example, it encompasses issues of strategic industry policy and, by extension, FDI policy as well as trade policy. Comprehensive reviews of the literature on ‘STP’ are provided by STEGEMANN (1989), COHEN (1990), OSTRY (1990) and RICHARDSON (1990). The demand in the U.S. in particular is for a shift away from ‘free’ trade towards ‘fair’ trade-‘fairness’ being defined by the U.S.! An early sign of this shift in emphasis was apparent in the 1974 U.S. Trade Act. However, it became quite explicit in the 1988 Omnibus Trade and Competitiveness Act, especially in the so-called ‘super 301’ clause which aims to achieve reciprocal access to what the U.S. defines as unfairly restricted markets. The difference between the 1974 and 1988 acts is that the 301 clause is now applied to entire countries and not, as before, to specific industries. In relation to Japan, the U.S. has also negotiated a Structural Impediments Initiative whose aim is to remove what are seen by the U.S. as structural restrictions on access to the Japanese market. These shifts towards a more strategic policy are particularly evident in the high-technology sectors which are seen to be at the centre of a country’s future competitive position. The basic rationale is that, in imperfectly

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markets

governments

307

3/1992 must intervene

in

favour of their domestic firms. As OSTRY (1990, p. 6) points out, the argument is based upon two issues: “the ‘first mover advantage’ that a country or firm captures by preempting foreign rivals . . . (which) . . . provides the opportunity for firms and countries to consolidate and extend their competitive advantage”, overs which

and the issue of externalities enhance the competitiveness

parts of the domestic Hence, one important regulatory environment

or spillof other

economy. change in the international is this increased emphasis on

competitive strategic policies. A second major development in the last 12 years or so has been the trend towards the deregulation of certain economic activities. As CERNY (1991, p. 173) observes, ‘deregulation’ emerged as a major phenomenon in many industriahsed countries during the 1980s: The concept of deregulation-as it has been used by most commentators, whether politicians, journalists or academics-is deceptively simple. It means the lifting or abolishing of government regulations on a range of economic activities in order to allow markets to work more freely, as in classical capitalist economic theory. Proponents of this image of deregulation believe that government regulations have come to distort the efficient working of markets. Deregulation of this sort has been intended, firstly, to reduce the costs of conforming with regulations these costs are thought to more than counterweigh the social, economic and political benefits of the particular regulations in question. In addition, even relatively ‘costless’ regulations are often seen as counterproductive in that they distort market actors’ calculations of allocative efficiency at the microeconomic level.

In the light of such arguments,

a variety of sectors in a number of countries-notably telecommunications and financial services-have been, or are being, deregulated. However, as Cerny points out, the issues are, in fact, extremely complex. In particular, deregulation at the national scale has to be seen in its wider, international, context. In fact, “deregulation cannot take place without the creation of new regulations to replace the old” (CERNY, 1991, p. 174). In effect, what is often termed deregulation is really ‘reregulation’. This interpretations is especially apparent in the context of the third major development in the international regulatory environment: the strengthening

of regional

economic

the 1980s witnessed opments complete

integration. two extremely

The final years of significant

devel-

in this regard. The first was the process to the Single European Market by the end of

1992. The second was the signing of the CanadaUnited States Free Trade Agreement and the initiation of negotiations to create a North American Free Trade Area involving, in the first instance, Mexico. Some observers see these developments as a kind of concerted move to restructure the global economy into three major regional economic blocs. OSTRY (1990, p. 12), however, argues that “the coincidence in timing is accidental, not planned” and points out that “the FTA and Europe 1992 are very different in both genesis and nature”. Nevertheless, the emergence of changed and strengthened regional blocs greatly alters the nature of the international regulatory surface on which TNCS operate. But it does so in complex, and often uncertain, ways. Both regional agreements will take several years to implement fully the enormous reforms needed to change existing regulatory structures. The move to the new, enlarged, scale of regulation is far from straightforward and, in the transitional period, the regulations regarding access and operations will become more difficult to cope with. Major conflicts have developed between the U.S. and the EC on the one hand over market access issues (WOOLCOCK, 1991), and, on the other, between the EC and Japan and some Asian countries over anti-dumping measures. In summary, the changing regulatory structures in the global economy in the areas of trade, foreign investment and industry policy are a reflection of the increasingly intensive competitive position in which nation-states now find themselves. In an increasingly integrated and interdependent global economy nation-states are engaged in fierce competitive rivalry. In CERNY’s (1991, p. 183) view, the nationstate is a ‘competition state’ whose problem is one of facing “major adjustments to shifts in competitive advantage in the global market place”. PORTER (1990, p. 19) argues strongly that “competitive advantage is created and sustained through a highly localised process. Differences in national economic structures, values, cultures, institutions and histories contribute profoundly to competitive success . . While globalisation of competition might appear to make the nation less important, instead it seems to

Geoforum/Volume

308 make it more so. With fewer impediments to trade to shelter uncompetitive domestic firms and industries, the home nation takes on growing significance hecause it is the source of the skills and technology that underpin competitive advantage.” Of course, a major component of the competitive struggle between states is their relationships with TNCs whose spatial strategies, regulatory

in turn, are strongly behaviour.

influenced

by state

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structures in the global economy we need to keep in mind the fundamental nature of the relationships between TNCs and states. In the specific case of regulation, the most obvious assumption would be that TNCs will invariably seek the removal of all regulatory barriers which act as constraints and impede their ability to locate wherever, and to behave however, they wish. Removal of all barriers to entry, whether to imports or to direct presence; freedom to export capital and profits from

3. Regulatory

Structures

Oppo~unities: Nation-states

interactions

as Constraints between

and

TNCs and

While states are engaged in competition with other states to enhance their position they are also locked into compiex interactions with TNCs. This relationship cannot be reduced to the simple universal generalisation that, in such interaction, the power invariably lies with the TNC. It is, however, given the fundamental differences between their specific goals, inevitably an uneasy relationship which tends to Auctuate between conflict and cooperation and may be extremely variable between different sectors of the economy. As GORDON (1988, p. 61) observes, “it is perhaps most useful . to view the relationship between multinationals and governments as both cooperative and competing, both supportive and conflictual. They operate in a fully dialectical relationship, locked into unified but contradictory roles and position, neither the one nor the other partner clearly or completely able to dominate.” PITELTS (1991, p, 142) proposes that the relationship between TNCs and nation-states should be analysed within a rivalry and collusion framework, arguing that “the degree of rivalry and collusion will depend heavily on whether the relationship refers to TNCs’ own states or ‘host’ states, as well as whether the states in question are ‘strong’ or ‘weak’, DCs or LDCs”. Whether or not a particular situation is one of rivalry or collusion the essence of the TNC-state relationship is one of overt or covert bargaining. As NIXSON (198S, p. 378) points out, “it is this process that in large part determines the extent, nature and distribution between the participating agents of the costs and benefits that arise as a result of direct foreign investment”. Thus, in considering TNC attitudes and responses towards different regulatory

local operations; freedom to import materials, components and corporate services; freedom to operate unhindered in local labour markets-these would all seem to be the ultimate preference for TNCs. Certainly, given the existence of differential regulatory structures in the global economy, TNCs will seek to overcome, circumvent or subvert them. Regulatory mechanisms are, indeed, constraints to a TNCs’ strategic and operational behaviour. Yet it is not quite as simple as this. The very existence of regulatory structures can be perceived as an oppor~~~jr~ available to TNCs to take advantage of regulatory differences between states by shifting activities between locations according to differentials in the regulatory surface. Clearly, this is not an option which is available to purely domestic firms. AS we shall see later, TNCs do indeed engage in regulatory avoidance. Other things being equal, therefore, TNCs will be attracted to countries where the treatment of foreign firms is liberal rather than restrictive. Where regulatory differences do exist, TNCS may well use them in their n~g~?tiations with g~~vernments, particularly where the latter are anxious to attract specific TNC investments. Such competitive bidding between states (and between regions and communities within states) to attract TNC investment has undoubtedly intensi~ed in recent years (DICKEN, 19911). Several writers have pointed to the fact that TNCS have a somewhat ambivalent attitude to state regulatory policies. For example, PICCIOTTO (1991, pp. 43,46) points out that: TNCs have

favoured minimal international coordination while strongly supporting the national state, since they can take advantage of regulatory differences and loopholes. . While TNCs have pressed for an adequate

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coordination of national regulation, they have generally resisted any strengthening of international state structures. Indeed, the emergence of internationalised ownership of capital through such international corporate groups resulted from the existence of national protectionist regulation: not only tariffs, but national procurement and national protection of scientific innovation. Having secured the minimalist principles of national treatment for foreign-owned capital, TNCs have been the staunchest defenders of the national state. It is their ability to exploit national differences, both politically and economically, that gives them their competitive advantage.

More specifically, present a detailed will tend

YOFFIE argument

increasingly

and MTLNER (1989) to the effect that TNCs

to support

a strategic

trade

policy in their home country with the expectation that this will open up market access in foreign countries and enable them to benefit from large-scale economies and learning curve effects. Such general comments should not create an impression of a uniform response among TNCs to regulatory differentials although there are some kinds of regulation which will tend to produce a fairly general reaction. For example, all TNCs will engage in transfer pricing in order to take advantage of inter-nation differences in taxation levels and regulations (LALL, 1973; MURRAY, 1981; UNCTC, 1988). But, for the most part, responses to regulatory differences are contingent upon specific circumstances in which particular TNC strategies are especially significant. Some of the most influential ideas on a firm’s competitive strategy have been developed by PORTER (1985, 1986). According to Porter, business firms will seek to achieve a competitive advantage in their particular industry through the pursuit of one of three ‘generic strategies’: cost leadership, differentiation or focus (niche). At an international scale, both Porter and DOZ (1986) argue that industries exist along a competitive-scope spectrum ranging from multidomestic at one end of the spectrum to global at the other. Prior to the 196Os, most TNCs invariably pursued a multidomestic (or nationallyresponsive) strategy in their international operations whereby autonomous national subsidiaries served individual national markets. TNCs capitalised on their ownership-specific advantages and transferred intangible assets (through the internalisation of markets for intermediate goods) to their overseas subsidiaries. This could be done very cheaply-

effectively

at marginal

seas plants

cost-once

was established

a network

(DOZ,

1986).

of overConse-

quently, these affiliates possessed a number of competitive advantages compared with purely domestic firms, enabling them to compete very effectively in specific national markets. The domestic or nationally-responsive

essence of a multistrategy is an inter-

national network of commonly owned, but quasiindependent, operations, each of which is responsive to the characteristics of individual national markets. This kind of international extremely investment gionally

competitive

strategy

is still

common among TNCs. Most foreign direct remains oriented towards national or recompact

markets

(THOMSEN,

1992). But a

growing number of TNCS, most notably (although not exclusively) the larger ones, have been developing globally integrated competitive strategies in pursuit either of economies of scale or economies of scope and coordination. Categorising industries (or firms) into these two polar opposites is clearly a severe distortion of reality. It suggests two mutually exclusive strategic orientations whereas, in fact, each must contain elements of the other. Firms operating in so-called multidomestic industries must take account of global forces while, conversely, firms operating in global industries must be responsive to national and local differences. The intensification of global competition in a world which still retains a high degree of local differentiation creates, for all TNCs, an internal tension between globalisation forces on the one hand and localisation forces on the other (BARTLETT and GHOSHAL, 1987). These pressures greatly complicate the nature of the responses of TNCs to regulatory differences between states. Such complications are intensified by the fact that the global-local tension applies at each stage of the firm’s production (or value-added) chain. Spatial variations in regulatory structures will surely influence (though are unlikely to determine) the extent to which the production chain is integrated or disintegrated geographically. As Porter has shown, international competitive strategies involve both the organisational coordination of a firm’s activities within the production chain and also their geographical configuration. Different regulatory structures, therefore, will have different implications according to a firm’s position in this two-dimensional space.

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Whether

or not a specific regulatory

mechanism

is a

even to dismantle,

23 Number

the MNC integrated

311992

manufactur-

constraint or an opportunity will depend, at least in part, on whether the firm is pursuing a nationally-

ing and trade networks restrictions on foreign

responsive or a globally-integrated strategy. For example, the primary requirement for a firm pursuing a nationally-responsive marketing strategy is unhin-

access”. In such circumstances, what matters is the relative bargaining power of the state on the one hand and the TNC on the other. The relative bargaining power of TNCs and host countries is a function of

dered

access to its target

markets.

Regulatory

bar-

riers, such as tariffs or NTBs, will usually stimulate

a

response by which the firm sets up operations within the regulated market. The picture is complicated in regional

economic

groupings,

such as the EC prior to

the completion of the Single Market, where there are differential regulatory barriers affecting a firm’s spatial strategy regional market

but in which access to the larger may be achieved. In these circum-

stances, firms may well member country against regulatory differences.

be able another

to play off one on the basis of

A more complex situation arises in the case of TNCs attempting to pursue a globally-integrated strategy. The essence of such a strategy is the ability to locate each part of the production chain in optimal conditions (for example, to use cheap labour for basic assembly operations). The integrated structure, therefore, consists of a complex network of managerial, research, production, marketing, distribution and service nodes linked together by intricate crossborder flows. On the one hand, such global networks provide TNCs with the potential ability to minimise regulatory constraints and maximise regulatory opportunities because they may be able to switch and reswitch their operations between alternative locations. In this sense, global firms may be able to engage in ‘regulatory arbitrage’, that is, to benefit from the differences in regulatory structures between states at a global scale. Most obviously this is the case with transfer pricing. More generally, however. the ability to engage in regulatory arbitrage is limited by the existence of fixed capital investments. The TNC’s ability to switch and reswitch activities between alternative locations is often exaggerated. Much will depend upon the extent to which TNCs set up dual or multiple sourcing arrangements on either an internalised or an externaliscd (subcontracting) basis. On the other hand, states may well have the ability to inhibit the achievements of globally-integrated strategies. As DOZ (1986, p. 39) has observed. “host governments wield the power to limit the extent of, or

three demand

related

elements

with more regulations and investments and market

(Figure

1): (1) the relative

by each of the parties for the resources

which

the other controls, (2) the constraints on each which reflect the translation of bargaining power into control over outcomes, participants.

(3) the negotiating

status of the

Conventionally, the activities of TNCs have been equated with the actual ownership of assets in more than one country. Indeed, this is the only criterion on which comparative statistical data are available at an international scale. However, as Figure 2 demonstrates, FDI. whether by greenfield investment or by acquisition and merger, is only one possible mode of foreign involvement which firms might adopt. Recognition of a diversity of modes implies a broader definition of the TNC; one which is not confined to direct equity ownership. This, indeed, has been the position of the UN Centre on Transnational Corporations whose definition has broadened substantially during the past 15 years. COWLING and SUGDEN (1987, p. 60) suggest a far more flexible definition of the TNC: “A transnational is the means ofcoordinating production from one centre of strategic decision making when this coordination takes a firm across national boundaries.”

Thus, a firm’s international involvement may well take the form not only of FDI of the conventional variety but also (and increasingly) various forms of strategic alliance (JAMES, 1985; BUSINESS INTERNATIONAL, 1987; CONTRACTOR and LORANGE, 1987; MORRIS and HERGERT, 1987; WELLS and COOKE, 1991), international subcontracting (GERMIDTS, 1980; HOLMES, 1986; UNCTC, 1988) and various forms of networking (BARTLETT. 1986). At least in part, although to varying degrees, these various modes are a response to regulatory differences in the global economy. Strategic alliances, for example, are very often a means for firms to get a foothold in tightly regulated markets by joining up with domestic firms.

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TRANSNATIONAL

311

3/1992 HOST

CORPORATION

Constraints

Power

resources

Power

-1 Degree of competition ant concentration in the industry

Extent to which host country government is important

resources

Negotiating -ability -_* of TNC

Capital

m countries for the investment

1

Negotiating -ability -

-1

Dependence the economv

of tic

customer or distributor

1-1

-

Political

Employment

Change

q

Constraints

-1

VI -I

COUNTRY

of

climate

1

over

time

in relative

bargaining

strength

c Relative power 01 host country vis-kvis TNC increases

Relative power of TNC vls-a-vis host country increases

Figure 1. Elements in the countries. Source: DICKEN

bargaining relationship between TNCs and host (1992a, Figure 12.5). Based upon material in KOBRIN (1987).

Mode6

of forelgn

Involvement

I

Greenfield Investment Confnbutory IllfllJf?llCeS

(Producer ser&e~ Polltlcsl Tarrfls. NT& Relative exchange rates

I-t

rl

Consumer

1

I

‘I

servrces

PolItical

Investment mxntres (ltscarllwlanclal)

Property

EPZs Labour forcC2Controls Relatrve exchange rate! Offshore assemb(y tarrfl provisrons Quota circumventron rn third counlry markets

__----------

Figure

I

2. Modes

of foreign

involvement.

Source:

DICKEN

(1992a, Figure 7.16).

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4. Some fndustry Cases In this

final

developed because,

section,

some

above are applied

of the

in the final analysis,

contingency

in TNC

there

responses

cases

is a high level of

to regulatory

3/1992

example, Hong Kong firms began to shift clothing production to other Asian countries as early as the mid-1960s.

generalisations

to specific industry

23 Number

differ-

With the tightening

grip of the MFA

Hong Kong manufacturers

in the 1970s,

set up plants in the Philli-

ences. Each case illustrates, in the briefest of terms, rather different aspects of the TNC-state regulatory

pines, Thailand, Malaysia and Mauritius and, subsequently, in Indonesia and Sri Lanka to get around

interface.

quota ments

industries

manufacturing

are unique industries

In the past decade, huge investmade in China. East Asian firms

have also begun to establish plants in Europe and North America (including the Caribbean) to serve

4. I. Textiles nnd ctuthirzg These

restrictions. have been

in that they are the only

which

exist

within

an

industry-specific international regulatory framework: the Multi Fibre Arrangement (MFA). Most world trade in textiles and clothing is covered by this arrangement whose origins go back to the 1962 Long Term Arrangement initiated by the U.S. to counteract Asian imports but which was broadened into the MFA in 1974. Since then the MFA has been renegotiated several times and the intention was to incorporate it into the Uruquay Round of the GATT. The basis of the MFA is a highly complex, productspecific set of individual quotas which set precise limits on the quantity of textile and clothing which can be exported from one country to another. For every single product, a quota is specified; when exports reach that level no further trade is permitted. The MFA is the single most important measure shaping the global geography of international trade in textiles and clothing. It has had especially serious effects on the industry in developing countries. But it has also had a major influence on the locational and organisational strategies of textile and clothing firms. An inevitable consequence of the increased restrictiveness on developing country exports of textiles and clothing has been a parallel increase in efforts to circumvent the restrictions by both developed and developing country firms. Such evasive action may take a variety of forms. One method is for firms in a producing country which has reached its quota ceiling in one product to switch to another. Anotherillegal-method is the use of false labelling to change the apparent country of origin. Yet another is for firms to relocate some of their production to countries which either are not signatories to the MFA or whose quota is not fully used by indigenous producers. FOJ

developed country markets directly. country producers and retailers, likewise,

Developed have devel-

oped spatial and organisational strategies to circumvent the constraints of the MFA. The MFA, therefore, has had a major influence on both the production strategies and the sourcing strategies of firms within these industries, both manufacturers and retailers. There can be little doubt that the global shape of these industries would have been very different in the absence of this particular regulatory framework.

4.2. Automobiles Historically, the global geography of automobile production owed a great deal to its early national regulatory structures, especiaIly import tariffs. The existence of high tariffs on imported vehicles from the early days of the industry’s development led directly to major investment decisions by the leading producers. notably the U.S. companies, to build or acquire assembly and manufacturing plants in each major national market. Such nationally-responsive decisions were reinforced by technical regulations which were highly differentiated between countries. The inheritance of this regulation-driver1 pattern has been a subsequent lengthy rationalisation and restructuring of national operations to t-c-position firms in regional and global markets. Since the 197Os, however, largely because ofthe increasingly intensive cotnpetition from Japanese producers, the regulatory emphasis has shifted from tariffs to NTBs. Voluntary export restraints have been applied by the U.S. and by several European countries against Japanese automobile imports. These have, inevitably, helped to force Japanese automobile manufacturers to cstah-

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lish ‘transplant’ operations there. In the European case, the regulatory environment is, of course, changing dramatically as part of the programme to complete the Single Market (DICKEN, 1992b). Physical, technical and fiscal regulatory barriers to internal trade and investment are being removed certainly benefit those major automobile

and this will firms which

currently have the most highly integrated European operations. This is simply because their ability to optimise their in-house and externalised component and vehicle sourcing strategies will be greatly enhanced by the removal of internal physical and technical

barriers.

An important

additional

regulat-

ory mechanism focuses specifically on Japanese companies. The existing bilateral ‘voluntary’ agreements to restrict Japanese automobile imports operated by five EC member states are to be replaced by a very complex (and contentious) transitional arrangement to 1999 which freezes Japanese imports but allows growth of Japanese transplant production within the EC. At the Same time. the emphasis on local content levels has been enhanced, even though there is no specific quantitative level embodied in the Treaty of Rome. In the U.S., pressure to increase local content has helped to stimulate the arrival of more than 300 Japanese component manufacturers but, so far, the same trend has not occurred in Europe.

4.3.

Semiconductors

The semiconductor industry was the first major industry in which a clear international spatial division of labour developed. Starting with the early decisions of U.S. manufacturers to move assembly operations offshore in the 1960s a global system of production has become the norm, with a clear spatial segmentation of various stages in the semiconductor production chain. The semiconductor industry became one to which the term ‘global factory’ could fairly be applied (GRUNWALD and FLAMM, 1985; HENDERSON, 1989; SCOTT and ANGEL, 1988).

government regulatory involvement. In some cases, such as Singapore, this control was exercised mainly though government influence depoliticisation of the labour state

policy

(CASTELLS

er al.,

1991). In

others, like South Korea, control of the labour market was more overtly repressive. Second, the particular nature

of U.S.

customs

regulations,

specifically

those related to the Offshore Assembly Provision, greatly facilitated the offshore movement of assembly activities

by U.S. semiconductor

companies.

During the 198Os, regulatory issues in this industry have focused more explicitly on trading relationships between

Japan

on the one hand

and the U.S.

and

Europe on the other. Two key issues have been the alleged restriction of access to the Japanese market for semiconductors and the claims that Japanese chips have been dumped in overseas markets at excessively low prices. The U.S. response, under pressure from domestic semiconductor firms, has been to negotiate a semiconductor pact with Japan, one of whose aims is to increase the U.S. share of the Japanese semiconductor market to 20%. In Europe, particular emphasis is being placed on regulating market access and on persuading both U.S. and Asian semiconduct~)r firms to locate more of their design and fabrication functions within Europe. Antidumping measures and efforts to enforce price levels (related to those of the U.S.-Japanese semiconductor pact) are clear attempts to influence the spatial strategiesof semiconductor producers. Of course, the semiconductor industry in both the U.S. and Europe is made up of both domestic and foreign companies. In both cases, ‘foreign’ companies have been prevented from participating in domestically-organised consortia such as Sematech in the U.S. and JESSI in the EC. In the latter case, for example, the British computer company, ICL, was expelled from the consortium after its takeover by the Japanese company Fujitsu.

4.4. In one sense, the spatial strategy of offshore assembly was not obviously motivated by regulatory considerations; rather it was an overt search for cheap labour. However, two important regulatory mechanisms were undoubtedly significant. First, the basis of low labour costs in most of the NICs was a high level of

housing

on wage levels, the unions, and through

PharmnceuticcrEs

The final example in this brief review of specific industry cases is the most closely regulated of all. Whereas in the other industries discussed differentials on the regulatory surface are important they are rarely overwhelmingly so. In pharmaceuticals, the

314

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regulatory framework tal to their competitive same

time,

facing producers is fundamenand spatial strategies, At the

pharmaceuticals

is an industry

which,

rather like semiconductors, can be separated into a series of discrete stages of production whose individual spatial orientations differ. It is also one of the most highly R and D intensive industries, driven by the uncertainty producing

and very long lead times involved

and marketing

cessful drug (BRECH

a new, commercially

and SHARP,

in suc-

1984).

ensure

a financial

countries,

states-has played, and continues to play, a critical role in the industry’s spatial organisation at a global scale. Pharmaceuticals production exists within a very stringent and complex political and regulatory environment. Before a drug can be put on the market it has to be subjected to very thorough, expensive and time-consuming pre-clinical trials. The time taken for this process varies widely from one country to another but can be up to 10 years. In addition, in most countries the major customer for drugs, in the sense of who picks up the bill, is either the state or a stateregulated private agency. Differentials in health care policies between countries are, therefore, extremely important to the strategies of pharmaceutical companies. These regulatory devices act as NTBs to trade in pharmaceuticals, creating quite distinctive national markets.

especially

between

and devel-

oping countries. Similarly, there are national variations in the time involved

wide interin the drug

approval process. It has been estimated, for example, that the process in the U.S. takes roughly twice as long as in Europe. One result of this regulatory has been to encourage

countries

and

U.S. pharmaceuti-

to invest in R and D in certain to perform

clinical trials and drug differences in government

the complex approval policies

overseas process

of

abroad. Finally, towards the intro-

duction and marketing of generic drugs poses a further regulatory factor in the strategic decisionmaking processes of pharmaceutical firms. Again, as in other industries, the planned completion of the Single European Market will drastically change the regulatory surface on which pharmaceutical companies operate. When a single drug approval process is eventually implemented across the entire EC then, at least potentially, the spatial strategies of pharmaceutical companies may well change and the close physical tie with individual national markets may be broken. However, there is a long way to go before that stage is reached.

5. Conclusion

The stage of pharmaceuticals production which has been most responsive to regulatory differentials is the final stage of drug formulation and packaging. Pharmaceutical companies have invariably located this stage in accordance with state regulatory pressures. In many cases, a drug needs to be ‘produced’ in a specific country in order to be acceptable to the regulatory authorities and, therefore, to be marketable there. Many countries place restrictions on the import of made-up drugs. A common practice, therefore, is for the R and D and bulk production of drug components to be concentrated either in the firm’s home country or in a small number of other technologically advanced countries, and for the final stages to be spatially distributed in response to marketaccess regulations.

Drug companies

invest-

developed

difference

structure of the pharmaceutiis highly variable between

on the enormous

311992

ments made in R and D. However, the level and duration of patent protection varies widely between

cal companies The specific regulatory cal industry-which

return

23 Number

rely heavily

on patent

protection

to

This paper has endeavoured to explore the influence of national regulatory policies on the spatial strategies of transnational corporations. As shown this is, in fact, a two-way process. On the one hand, TNCs respond to differentials in the regulatory surface: on the other hand, the changing nature of the regulatory surface itself is, at least partly, a state response to the strategies of TNCs. The scope of this paper has been limited to just three aspects of state regulation: trade, foreign investment and industry policy. But these, of course, need to be set within the broader regulatory framework at the macro-scale. The issues discussed in this paper are merely a part of the whole set of interrelationships which exist between states and TNCs. Unfortunately, the geographical literature has tended to pay scant attention to these complex. but highly significant, politico-economic interactions. Indeed, much of the literature on the new international

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division of labour gives very little emphasis to the role of the state as a significant actor in shaping the contemporary global economy. There is a real need for geographers to engage in research into the interactions between states and TNCs, into the dynamic impact of changing regulatory environments, into the bargaining processes involved.

and

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