Chapter 12 Review Questions Answer Key

1. Entrepreneurship refers to the private sectors in capitalist economic development. Entrepreneurs have a kind of special ability to see new ways to put economic factors together to cause economic growth, such as new products, new productive processes, or accessing new markets. As an approach to explaining what pushes capitalism forward one must be agent-focused, rather than relying on abstract categories like “accumulation of capital” or “investment.” Someone does something with capital. In this regard, the focus must be on the leadership of special individuals, innovation, and economic growth and development. However, it fell to later theorists to address what conditions facilitated the emergence of entrepreneurs. [p. 207]

2. The micro-enterprises and independent entrepreneurs operating businesses that are not legally registered, can’t get bank financing, don’t pay taxes, and don’t follow labour or health and safety regulation. The informal economy is of principal interest for this discussion because in developing countries, most entrepreneurial activity (in terms of employment) takes place in this sector, and it is often a survival strategy for the very poor that is precarious and with little potential for growth. [p. 208]

3. One of the most widely used tools to promote entrepreneurship in developing countries is micro-finance: the granting of small nominal loans to would-be entrepreneurs. Micro-finance came to worldwide attention through the work of Muhammad Yunus, who established the Grameen Bank in Bangladesh and won the Nobel Peace Prize for his work in 2006. Yunus established a system in which small loans would be granted to individual women organized within a larger group under the principle of collective responsibility (if one failed to repay, they would all lose access to the loans). Repayment of the loan was a gateway to more loans, and failure to pay resulted in exclusion from the system. The system also involved compulsory savings by participants and intensive surveillance by caseworkers. This model of micro-finance used collective responsibility to substitute for a lack of collateral or property rights. It also promoted the empowerment of women in patriarchal societies by giving them access to loans and promoting solidarity and friendships with other women. [p. 208]

4. Various terms are used to describe multinational corporations (MNCs) and their activities, including transnational corporations (TNCs), multinational enterprises (MNEs), and foreign direct investment (FDI). Overall, these terms can be and are used interchangeably. Differences between them stem principally from disciplinary and institutional divides and practices: MNC is the most widely used term, employed by political scientists, sociologists, and the media; TNC is the preferred terminology of the United Nations system; and MNE is used in international business studies. FDI is a catch-all phrase, often preferred by economists, which refers to investment that is made across borders. The word “direct” in “foreign direct investment” indicates that the investment has a physical presence or corporate form (such as a branch plant) and differentiates this mode of investment from indirect investment, also known as “foreign portfolio investment” or colloquially as “hot capital” flows, which include the purchase of foreign debt, loans, and stock market investments. Foreign direct investment is much more stable than portfolio investment, since it involves an investment in physical and productive assets such as buildings, technology, and labour, which are more costly to abandon. [p. 209]

5. In contrast to foreign portfolio investment, FDI involves an investment in physical and productive assets such as buildings, technology, and labour, which are costly to abandon making FDI more stable than foreign portfolio investment. Foreign portfolio investment, a form of indirect investment also known as a “hot capital” flow involves the purchase of foreign debt, loans, and stock market investments, allowing investments to flow rapidly in and out of the host country, often leading to financial instability and balance-of-payments crises. [p. 209]

6. The “obsolescing bargaining model” is a dynamic and flexible approach to understanding state–firm relations. This model assumes that both states and firms want to maximize their benefit from FDI, firms seeing benefit as profits and states seeing benefits as positive spillover effects. Three factors are considered in the model: relative bargaining power (resources controlled by each party desired by the other), strategy (how the specific investment fits into each party’s overall economic strategy), and constraints (existence of alternatives and pressure from domestic or international actors). This model generally assumes that the firm initially has the upper hand as states are eager to attract investment. However, once the initial investment has been made and costs are “sunk” into fixed capital in the country, the state gains the upper hand and may change the rules of the game in the form of implementing regulations. [p. 216]

7. These are four strategies MNCs need to take into account:
1. Resource-seeking strategy: MNCs require specific resources that are only available abroad. Typically, these resources may include natural resources or agricultural goods, desirable services that can only be accessed locally, and specific managerial or technical skills.
2. Efficiency-seeking (or cost-reducing) strategy: MNCs plan to make their global operations more efficient through exploiting differences in the availability and cost of labour, capital, and resources. The location of light manufacturing and assembly plants in low-wage countries is an example of this strategy.
3. Market-seeking strategy: MNCs establish a subsidiary to serve the consumer demand of a local market directly instead of by trade. FDI is chosen over trade because it is required by law to enter the new markets, permits the product to be adapted to local conditions, is less expensive, or is a strategic response to competing firms.
4. Strategic asset-seeking strategy: MNCs buy up assets of other corporations as part of a global strategy to improve their competitiveness. [pp. 214-5]

8. The state–firm relationship is no longer determined simply by the willingness of states to pursue either a cooperative or a bargaining strategy. Increasingly, international agreements limit the range of policy choices open to governments in their relationships with multinational corporations. In the 1960s and 1970s, developing countries organized themselves in the United Nations General Assembly and the Group of 77 (G77) to demand changes to the world trade regime that would be “fairer” for developing countries. In response, the rich countries sought to create new mechanisms to protect their companies from developing-country pressures. The first efforts in this direction involved the negotiation of bilateral investment treaties (or BITs) between developed and developing countries. Such agreements typically enunciated principles of treatment that foreign investors were entitled to receive from host governments, such as most-favoured-nation and national treatment (the same treatment as that accorded to the firms of any third country or locally owned firms), just and equitable treatment, full protection and security (from expropriation), and the right to sue host governments in international tribunals for breach of obligations. The first BIT was signed between Germany and Pakistan in 1959, but the web of agreements had expanded to approximately 2658 worldwide by 2019. Few developing countries are not caught in this web, and many willingly signed such treaties in the hope that demonstrating the “right” attitude toward foreign investors would encourage increased FDI inflows and development. Thus far, the evidence that international investment agreements contribute to increased investment flows is mixed. [pp. 216-7]

9. At the global and regional levels, rules to protect foreign investors were also included in trade agreements. The Uruguay Round (concluded in 1994) of GATT negotiations added agreements protecting the rights of foreign investors and restricting the policy space of developing countries, the most notable of which were the TRIPs (Trade-Related Aspects of Intellectual Property Rights) agreement requiring respect for intellectual property and the TRIMs (Trade-Related Investment Measures) agreement forbidding the use of certain performance requirements (policies that imposed developmental obligations on MNCs). Since that time, a number of regional free trade agreements have included investment disciplines. As a result of this legalization of the rights of foreign investors, multinational corporations now enjoy more protection from governments and civil society groups than at any other time in history. [p. 217]

10. A major question related to international investment agreements (IIAs), such as bilateral investment treaties (BITs), is whether they restrict the policy space or the policy options open to governments in their dealings with multinational corporations. Most IIAs include investor–state dispute settlement provisions. These provisions permit a foreign corporation (but not a domestically owned firm) that believes its rights under an investment agreement have been violated to take the host government to “court” in binding international arbitration. Frequently, multinational corporations will claim they have not received “fair and equitable treatment” or that a particular governmental measure has affected their profitability to the extent that it may be considered “tantamount to expropriation.” Known arbitration cases have skyrocketed from around 12 in 1996 to 942 by 2018; in the latter year, 71 new cases were brought by mostly developed-country investors against host governments. Some have with resulted in major damage awards, such as the US$867 million award against Slovakia in 2004. This may represent the tip of the iceberg, since several of the arbitration venues open to investors conduct the proceedings in secret. Environmental and social activists have been particularly concerned that such investment protection could limit the ability of governments to make policy in the public interest if the interests of multinational corporations were damaged in the process or that a regulatory chill could result in which a government never implements good public policy for fear of being sued by affected foreign investors. For example, most developing countries have private health care delivery, but it might be too expensive to move to a universal public system if doing so damages the profits of multinational corporations and causes them to sue the government for compensation. [p. 218]

11. We must also recognize that the investment protection regime that expanded rapidly in the early 2000s is increasingly facing challenges from governments who now want to restrict the ability of companies to sue for damages in international arbitration. While the North American Free Trade Agreement (NAFTA) was considered a high point for the protection of companies’ rights, its successor, the Canada-United States-Mexico Agreement (CUSMA) signed in 2018 eliminated the recourse to dispute settlement for private investors. The Canadian government explicitly justified this outcome in terms of reducing the vulnerability of the state to monetary compensation claims originating with US investors. [p. 218]

12. Bilateral investment treaties (or BITs) between developed and developing countries typically enunciated principles of treatment that foreign investors were entitled to receive from host governments, such as most-favoured-nation and national treatment (the same treatment as that accorded to the firms of any third country or locally owned firms), just and equitable treatment, full protection and security (from expropriation), and the right to sue host governments in international tribunals for breach of obligations. The first BIT was signed between Germany and Pakistan in 1959, but the web of agreements had expanded to approximately 2658 worldwide by 2019 (UNCTAD 2019, xii). Few developing countries are not caught in this web, and many willingly signed such treaties in the hope that demonstrating the “right” attitude toward foreign investors would encourage increased FDI inflows and development. Thus far, the evidence that international investment agreements contribute to increased investment flows is mixed. [p. 217]