Essay/abstract International Economics

The Role of Multinational Corporations in the Global Economy

The increasing importance of multinational corporations in the global economy has raised interest in analyzing the political power they exercise over governments. The purpose of this paper is to investigate the variables affecting multinationals’ political role as a consequence of their economic relevance.

Institutions and Market Entry

Supportive evidence shows that differences in institutions pose a barrier to the global expansion of emerging multinationals. Typically, companies rely upon political connections – in particular managers’ interpersonal ties with public officials – when entering into new markets. These kinds of relationships are fundamental for firms to obtain credibility and license to operate in the eyes of the public. Moreover, companies can take advantage of preferential treatment by government-owned enterprises or lighter taxation.

Bargaining Power and Government Accountability

The quality of a country’s institutions is an important factor in determining the bargaining power of the government in face of multinationals. Studies on negotiations between countries and resource extracting firms demonstrated that a government’s accountability to its people is likely to influence its bargaining power. The more democratic a government is, the better the deals it can obtain.

Multinationals as Sovereign Entities

An innovative view of the multinational corporation sees it as endowed with attributes of sovereign states. They have large resources at their disposal and they are part of the complex network of international politics. Corporations helped the affirmation of weak and vulnerable political regimes, such as oil companies in Kuwait. Moreover, they facilitated the introduction of nation-states to the world political system, as the example of Libya shows.

Political Roles and Corporate Lobbying

Multinationals are increasingly drawn into political roles and perform tasks traditionally associated with the state. They have the ability to enforce internal decisions across countries – e.g. product and performance standards, codes of conduct – which states and intergovernmental organizations sometimes lack. This study also highlights the extension of corporate lobbying by which companies exercise power over governments as they become international, underlining that it has become a standard practice.

Competition and Bargaining Power

Finally, this paper is intended to explore the effect of competition on multinational bargaining power. The more intense the competition, the weaker the bargaining power. This has important implications for the success of corporations, because when their bargaining position is strong, they tend to experience a relatively low level of intervention in their operations. Furthermore, when multinationals are able to convince host governments that their management practices are responsive to the needs of host nations, they can better secure their strategic interests.