Two peas in a pod: the TNCs and globalisation Guyana and the wider world by Dr Clive Thomas Stabroek News October 15, 2000 Core Process The position taken in this series is that in the sphere of the economy, international production, i.e., the activities of the transnational firms (TNCs), is at the heart of the globalisation process. Other analysts emphasise instead the role of finance and the huge daily shifts in funds from one financial centre to another. While this is an important aspect of globalisation, the basis of the entire process is still the way that global production and technology are being re-organised and re-structured. As we shall see, ultimately the financial flows reflect these new patterns of re-organisation. Since last week's article, new information has been released by United Nations agencies indicating that there are now 63,000 TNCs worldwide, with 690,000 foreign affiliates and branches. This is significantly up from the figures I cited, which referred to 1999, when there were 60,000 TNCs and 500,000 overseas branches and affiliates. Current sales of TNCs have risen to US$14 trillion, as compared to US$11 trillion a year ago. The present figure is now almost double the total value of global exports. It is also projected that during this year the value of investment flows from the TNCs will exceed US$1 trillion. With such developments, it is understandable that globalisation and the expansion of TNCs are becoming more and more like the same thing. Indeed the argument can be made that ultimately policies in support of globalisation are really policies directed at supporting the global expansion of TNCs. At present, these TNCs are so powerful that they are easily the dominant economic influence over both national governments and the international organisations that regulate our global trade and financial system. Economic Concentration Earlier reference was also made to the rapid economic concentration taking place among TNCs. This pattern reflects a well-established tendency in all market economies, for economic power to be consolidated in fewer and fewer hands. As I reported last week the top 100 TNCs control over 15 percent of the total foreign assets of all 63,000 TNCs, and 22 percent of their total sales. This is a truly staggering outcome, as these 15 firms represent only about 0.02 percent of the total. It was also indicated that most of the TNCs are located in the "triad" of countries, the European Union, the United States and Japan. To date only one TNC from the developing world has entered into the league of the top 100. That firm is Petroleos de Venezuela with over US$8 billion foreign assets. The concentration, however, does not stop there. The bulk of the investment flows from TNCs go to other developed economies. Indeed, as much as three-quarters of the flows to developed economies go to only ten countries. Similarly, we find that although flows to the developing countries are substantially less than those to the developed economies, yet only ten developing countries receive as much as 80 percent of all investment flows from TNCs. A similar pattern is there with commodity concentration. The foreign sales of the top 100 TNCs are mainly in electronics, electrical equipment, automobiles, petroleum, chemicals and pharmaceuticals. As a result of this, five TNCs worldwide control more than one-half of the global market for consumer durables, automotive, airlines, aerospace, electronics components, electricity, electronic and steel. Further, five TNCs control more than 40 percent of the market for oil, personal computers, and the media. It should be noted as well that the United Nations estimates the total employment of all TNCs at six million persons. Further, 90 percent of all patents taken out for new inventions are held by TNCs. The TNCs consequently play a strategic role in framing many of the technical standards and conditions embraced by the World Trade Organization (WTO), in its rules governing global trade in goods and services. The driving force What is the driving force behind this development? Why has this stupendous growth in TNCs been occurring? While many plausible responses are possible, I believe that pride of place must go to policy changes. The facts in support of this are straightforward. Over the past decade the United Nations counted over 1,000 changes worldwide to national laws related to foreign investment. Of this amount, nearly all, ie 94 percent of these changes, have created a more favourable environment for TNCs to invest. There have also been large increases in the number of bilateral investment treaties and double taxation treaties designed to facilitate investment flows between countries. Thus, whereas in 1980 only 181 bilateral and investment treaties and 719 double taxation treaties were signed, last year (1999) the total number of such treaties had risen to 1,856 and 1,982 respectively. Mergers and Acquisitions Most of the investment flows and hence the growth in international production has been brought about by what are termed cross-border mergers and acquisitions (M&As). These occur when one firm buys out another in a different country, or when, as frequently happens, a TNC buys out a stated-owned enterprise put up for privatization in another country. Such types of investments differ from what are called greenfield investments. Greenfield investments involve the construction of new facilities, the opening up of new enterprises and so on, but M&As do not require this to occur. M&As occur horizontally, when separate firms in the same industry come under a single ownership. An example of this would be if BERMINE were to buy out, or was merged with LINMINE and Aroaima into one entity. It is horizontal because the same industry is involved. M&As also occur vertically. This usually takes the form of a client-supplier or buyer-seller linkage. An example would be if Tate & Lyle bought out GUYSUCO, if it were to be privatized. Then Tate & Lyle would vertically integrate GUYSUCO (as sugar producer) into Tate & Lyle (as sugar processor and refiner). Finally, there are conglomerate M&As. These occur when firms in unrelated industries merge, for whatever reasons. M&As occur not only across countries, but within them as well, and both are taking place at a remarkable rate. It is estimated that 70 percent of the value of all M&As (both cross-border and domestic) is horizontal. In terms of the number of M&As, the figure is 50 percent. Vertical M&As are next in importance. These have been increasing in recent times. At present, conglomerate M&As are the least significant of the three types. Anyone following the media would be aware of how frequently these M&As occur. The United Nations estimates this year that since 1980, the annual growth in the number of M&As, both cross border and domestic, has been at the phenomenally high level of 42 percent per year. Next week we shall explore this phenomenon of M&As further by addressing the question: what are the benefits and costs of this preferred type of foreign investment, in the age of globalisation. Follow the goings-on in Guyana in Guyana Today