THE UNITED STATES NAVAL WAR COLLEGE COLLEGE OF DISTANCE EDUCATION National Security Affairs THEATER SECURITY DECISION MAKING (TSDM) COURSE Multinational Corporations and the Shape of the Global Economy: The Economic Dimensions of National Security by Nikolas K. Gvosdev April 2011 Drawing on earlier work by Professor Hayat Alvi and Commander Brent Boston, USN TSDM 5-3 Version 5.0
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THE UNITED STATES NAVAL WAR COLLEGE
COLLEGE OF DISTANCE EDUCATION
National Security Affairs
THEATER SECURITY DECISION MAKING (TSDM) COURSE
Multinational Corporations and the Shape of the Global Economy:
The Economic Dimensions of National Security
by Nikolas K. Gvosdev
April 2011
Drawing on earlier work by Professor Hayat Alvi and Commander Brent Boston, USN
TSDM 5-3
Version 5.0
1
In 2011 the London-based International Institute for Strategic Studies (IISS) released its annual
Military Balance report, and this year’s version highlighted the impact of economics on national
security.
[O]ne key theme stands out. Western states’ defence budgets are under pressure
and their military procurement is constrained. But in other regions – notably Asia
and the Middle East – military spending and arms acquisitions are booming. There is
persuasive evidence that a global redistribution of military power is under way. …
Many states are seeking to translate their economic strength into military power
which they may then use in support of national goals ranging from protecting their
energy supplies to asserting territorial claims. How quickly the global redistribution
of military spending and procurement will translate into useful military capability
will vary according to national circumstances. However, it is already clear that as a
result of shifts in the global distribution of economic power and consequently the
resources available for military spending, the United States and other Western
powers are losing their monopoly in key areas of defence technology, including
stealth aircraft, unmanned systems – and cyber warfare.i
Indeed, a country’s ability to project and sustain power rests squarely on economic foundations;
securing the raw materials, energy, finished goods and financial wherewithal needed to equip,
transport and pay for an effective military force. National security professionals in recent years
have become much more cognizant of the relationship between economics and security; Derek
Reveron, a professor at the Naval War College, relates how he asked a senior officer in SOUTHCOM
“why the military is involved in ensuring ‘a favorable investment climate’ in Latin America,” he was
told that “poverty underlies most of the region’s security issues” and as a result the military had a
vested interest in promoting economic development by creating incentives for investment.ii
In many countries, the backbone of the economy is the small and medium enterprise (SME)
sector—those businesses which have less than 500 employees. In the U.S., for instance, SMEs
account for 99 percent of firms in the country, and have been responsible for the creation of some
65 percent of the nation's jobs over the last two decades.iii However, in this reading, we will
concentrate on the large conglomerates, particularly the multinational corporation (MNC), that
have the ability to influence and affect the national security environment.
The World of the Multinational
The building block of the global economy is generally considered to be the multinational
corporation. A multinational corporation (MNC) is defined as an international business enterprise
with a centralized head office in a home country from which it coordinates global management as
well as offices and/or factories in at least one other country. . Sometimes an MNC is referred to as a
“transnational corporation.” Transnational corporations (TNCs) are similar to MNCs: A TNC is “an
enterprise comprising entities in more than one country which operate under a system of decision-
2
making that permits coherent policies and a common strategy. The entities are so linked, by
ownership or otherwise, that one or more of them may be able to exercise a significant influence
over the others and, in particular, to share knowledge, resources and responsibilities with the
others.”iv
Throughout much of the 20th century, most MNCs were American, Japanese or Western
European—encompassing such enterprises as Nike, Coca-Cola, Wal-Mart, Apple, Microsoft, Toshiba,
Honda, and BMW. While many of the top MNCs remain from the most economically developed
countries of the globe, what is striking, over the last decade, has been the emergence of MNCs from
the so-called “World Without the West”—especially from the rising powers of the global south and
east.[See the tables at the end of this reading for a list of the leading global companies.] The gap
between the “developed” and “developing” world is closing; as Thomas Barnett and Stephen
Deangelist point out, “emerging and frontier economies in Latin America, Africa, the Middle East
and Asia will outspend the West by almost two-thirds on future water, electricity and
transportation infrastructure. With all that construction -- roughly $40 trillion by 2030 -- global
supply chains will be further extended” allowing for economic power to be diffused over an even
greater portion of the world.v As a result, as economist Javier Santiso notes:
The corporate world has changed remarkably in the past ten years. New
multinationals are emerging in countries such as Brazil, India, China, South Africa
and Mexico. The entire global corporate chessboard is rapidly being altered.
In some sectors, such as steel or cement, the global leaders are no longer
corporations from developed countries. For example, in 2006, an Indian group,
Mittal, took control of its European based rival Arcelor and became the leader in the
steel sector while the Mexican company Cemex is in the same league as Lafarge
(French) and Holcim (Swiss). In early 2007, Tata Steel also completed a major
takeover of its UK rival Corus. With the takeover of the Canadian based company
Inco in 2006, the Brazilian minerals producer, CVRD, is now topping international
rankings along with the Anglo-Australians of BHP Billiton and Rio Tinto. The list of
emerging multinationals competing head to head with their OECD counterparts is
increasing fast, including Chilean based corporations like ENAP, public companies
like PDVSA from Venezuela and more often private ones like Petrobras from Brazil.
From South Korea, Samsung, LG or Posco are worldwide competitors while Russian
giants like Gazprom are increasingly willing to trespass their frontiers, following the
example of Chinese companies like Lenovo or Indian conglomerates like Tata.vi
Some multinationals have resources and capabilities at their disposal greater than many
governments. Indeed, “the awesome size and international scope of a handful of global corporations
has encouraged many writers to reflect how they have outgrown and dwarf national states. Alfred
Chandler and Bruce Mazlish have described them as the new Leviathans which ‘increasingly
challenges the power of the nation-states and of regional entities.’”vii As a result, MNCs are
influential in many ways. Corporations contribute to the creation of goods, services, and wealth on
an enormous scale. They add to the global exchange of ideas. They can introduce “best practices”
3
into a country and can also contribute to desirable change within a society. The “Sullivan
Principles”, for instance, adopted by U.S. firms doing business in South Africa during the period of
apartheid, committed those firms to create workplace environments that were color-blind and to
offer training and promotion opportunities to all employees regardless of race.
MNCs, however, can also be problematic for national governments. In particular, the
question of a firm’s “nationality” is becoming murkier. Harvard Business School professor Geoffrey
Jones observes that, “in the past, there were recognizable US corporations whose interests could be
identified with those of the United States … US - and other - multinationals were large, integrated
corporations with clearly defined boundaries, in which ownership and control lay indisputably in
the home economy.”viii Today, however, the situation may be far more ambiguous. An MNC might be
registered and incorporated in one country, have its headquarters in another country, have the
majority of its shareholders be citizens of other countries (or have its shareholders be sovereign
wealth funds, government-controlled entities), and undertake the bulk of its economic activities in a
completely different set of countries. Halliburton’s decision to move its corporate headquarters
from Houston to Dubai in 2007 and to seek to list its shares on a Middle Eastern exchange in
addition to the New York Stock Exchange raised concerns that the firm was “leaving” the United
States—but the company stressed it would continue “its legal incorporation in the United States,
meaning that it will still be subject to domestic laws and regulations.”ix But this concern that MNCs
may no longer be “good corporate citizens” of a particular country—and that an MNC
headquartered in the United States, for instance, may not automatically consider itself obligated to
promote American interests—is growing. R. Alan Hedley concluded:
Transnational corporations operate wherever in the world financial considerations
dictate. Because laws and standards governing corporate behavior vary from one
national jurisdiction to another, they form part of the decisional criteria on where
corporations locate, the type of business they conduct, and the relationships they
establish. TNCs are thus able to select from a broad array of regulatory frameworks.
Furthermore, they can sometimes avoid what may be perceived as “punitive”
government regulation by temporarily going “offshore,” or by forming short-term
strategic alliances with other corporations more advantageously placed with regard
to regulatory restrictions. Transnational networking arrangements have prompted
the United Nations Centre on Transnational Corporations to conclude that an
increasing number of “business activities are interlinked across national boundaries
in ways that leave them not fully under the control of a single corporate office
against whom national regulations can be applied.”x
Concerns about a multinational corporation’s “nationality” became very apparent when a private,
public-traded company (one in which ownership of the company is determined by the ownership of
shares which are openly traded on a stock exchange) acquires a new owner. For instance, when DP
World, a state-owned enterprise in the United Arab Emirates, was in the process of purchasing a
British firm, Peninsular and Oriental Steam Navigation Company (P & O), in 2005, questions were
raised about the leases that P & O had to operate port facilities in a number of U.S. cities, including
4
New York. Concerns were raised, especially in Congress, about the reliability of a Middle Eastern
government owning the company which controlled security for key U.S. seaports. Ultimately, in
2006, DP World sold off P & O’s U.S. operations to the American International Group (AIG)’s asset
management division.
Different countries utilize different strategies to address such concerns. In the United States,
the Committee on Foreign Investment in the United States (CFIUS), an interagency committee
chaired by the Secretary of the Treasury, is empowered to review foreign investment in U.S. firms,
especially to determine if there are negative national security consequences. Similar to the National
Security Act of 1947, the Foreign Investment and National Security Act of 2007 set down the
members of the Committee by statute, required that the Director of National Intelligence be an ex
officio member of the committee, and strengthened the Committee’s ability to review transactions
and to enforce “mitigation agreements” which would address any national security concerns that
would arise from the purchase of U.S. assets by non-U.S. entities. Other governments, in contrast,
set down very clear criteria for determining when a company is “controlled” by “foreign” elements
and then enact legal barriers to their activities: Russian law, for instance, defines a Russian-
incorporated company to be considered under foreign control when non-Russian citizens or
entities have the “capacity … to determine, directly or indirectly, decisions made by a commercial
organization of strategic importance, by means of instructing the votes” that are cast in the board of
directors.xi Companies so designated as “foreign” are therefore barred from involvement in certain
strategic industries in Russia, or from developing large natural resource deposits; in development
of Russia’s offshore natural resources, the government has also explicitly limited participation to
companies registered in Russia where the Russian state or Russian state companies hold at least a
50 percent stake.
In some cases, governments can assuage their concerns about a firm’s nationality by taking
a direct stake in a company. Beyond privately-owned MNCs, there are a growing number of
prominent state-owned enterprises (SOEs) which have become global players. An SOE is structured
like a privately-owned MNC (and may even trade some of its shares on stock exchanges) but a
government owns the controlling stake (although, in some cases, private investors are minority
shareholders, as is the case with Russia’s gas monopoly GAZPROM and the state oil company
Rosneft). Some SOEs are powerful industrial conglomerates, such as the Dongfeng Motor
Corporation in China. Others control vital natural resources, such as Endiama, the diamond
company owned by the Angolan state.
An important subset of SOEs is the “national oil company” (NOC). Today, some three-
quarters of all the world’s oil reserves are owned by NOCs; only 3 percent are owned by privately-
held MNCs (like Exxon Mobil, Royal Dutch Shell, or BP). Some of the key NOCs include Saudi Aramco
41. American Insurance Group (United States) $103 billion
42. Lloyds Banking Group (Britain) $102 billion
43. Cardinal Health (United States) $99 billion
44. Nestle (Switzerland) $99 billion
45. CVS Caremark (United States) $98 billion
46. Wells Fargo (United States) $98 billion
47. Hitachi (Japan) $96 billion
48. IBM (United States) $95 billion
49. Dexia Group (Belgium) $95 billion
50. Gazprom (Russia) $94 billion
12
NOTES
i Military Balance 2011 (London: International Institute for Strategic Studies, 2011), at
http://www.iiss.org/publications/military-balance/the-military-balance-2011/press-statement/ ii Derek S. Reveron, Exporting Security (Washington, DC: Georgetown University Press, 2010), 91.
iii Scott A. Shane, “Are Medium-Size Businesses the Job Creators?” New York Times, August 5, 2009, at
http://boss.blogs.nytimes.com/2009/08/05/are-medium-sized-businesses-the-job-creators/. iv Definition as provided by UNCTAD; see “Transnational Corporations Statistics,” UN Trade Conference on Trade
and Development (UNCTAD), 2002, at http://www.unctad.org/Templates/Page.asp?intItemID=3159&lang= 1. v Thomas P. M. Barnett and Stephen F. Deangelis, “The New Rules: Managing Global Supply Chains a Key U.S.
Advantage,” World Politics Review, March 28, 2011, at http://www.worldpoliticsreview.com/articles/8321/the-new-
rules-managing-global-supply-chains-a-key-u-s-advantage. vi Javier Santiso, The Emergence of Latin Multinationals, OECD Emerging Markets Working Group Paper 04/2007,
3. vii
Geoffrey G. Jones, Nationality and Multinationals in Historical Perspective, Harvard Business School Working
Paper 06-052 (2005), 3. viii
Jones, 4. ix
Clifford Krauss, “Halliburton Moving C.E.O. From Houston to Dubai,” New York Times, March 12, 2007, at
http://www.nytimes.com/2007/03/12/business/12haliburton.html. x R. Alan Hedley, “Transnational Corporations and Their Regulation: Issues and Strategies,” International Journal
of Comparative Sociology, 40(1999), 217. xi
See the Russian federal law “On Regulating Foreign Investment in the Economy”, April 29, 2008, at
http://www.rg.ru/2008/05/07/investicii-fz-dok.html. xii
Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (New York:
Portfolio, 2010), 70. xiii
Andrea Rothman and Rainer Buergin, “Germany Has „Intensive Dialogue‟ With France on EADS,” Bloomberg,
February 7, 2011, at http://www.bloomberg.com/news/2011-02-07/germany-has-intensive-dialogue-with-france-on-
eads-update1-.html. xiv
“Russia's Grand Plan To Restore Its Glory,” Business Week, September 18, 2006, at
http://www.businessweek.com/magazine/content/06_38/b4001064.htm. xv
Ivor Crotty, “The Stereotypical Champion,” Russia Profile, October 3, 2006, archived at
http://www.ocnus.net/artman2/publish/Business_1/The_Stereotypical_Champion_26101_printer.shtml. xvi
Bremmer, End of the Free Market, 67. xvii
John Battersby, “SA's role in a new world order,” SouthAfrica.info, August 8, 2007, at
http://www.safrica.info/features/new-order.htm. xviii
Bremmer, End of the Free Market, 67; Danielle Dsane, “Putin humiliates oligarch Deripaska,” First Post, June
5, 2009. xix
Helen Massy-Beresford, Peter Apps and William Maclean, “Special Report: Renault's electric spy scandal,”
Reuters, January 28, 2011, at http://www.reuters.com/article/2011/01/28/us-renault-spy-idUSTRE70R19120110128.
In particular, they note: “intelligence and security experts expect government-linked corporate espionage and data
theft to increase in coming years. They say a lack of dividing lines between the state and corporations in countries
such as China or Russia, coupled with the fact that digital technology makes stealing huge volumes of information
so much easier, increase the risks companies face. In France, a country which has its own Economic Warfare
School, companies like Renault may have even seen this coming years ago. France's industry minister Eric Besson,
while careful not to point the finger at any country, underlined the case's importance to Paris by calling it a victim of
"economic war".
Companies have always tried to steal secrets from each other. Carmakers and other manufacturers regularly buy up
new models from rivals so they can study technical advances, a process known as reverse engineering. Sometimes
they go further, poaching staff or persuading them to come across with key intellectual material, buying corporate
secrets from third parties, even infiltrating their own spies into rival companies. …