How Large is the Domestic Footprint of MNCs?

The answer is "not much." There's a very interesting thing going on worldwide as Western stock indices hit all-new highs week after week while their local economies suffer from stagnation. The archetypal example, of course, is the American joke/con-omy (its performance is laughable and is buoyed by dubious, unsustainable factors like falling incomes) which shrunk 1% in the first quarter of 2014. America #1, baby! How is it possible that the US economy is going nowhere fast but US-headquartered firms' equity valuations are zooming ever higher? Surely this is a classic case of Greenspan's "irrational exuberance"? Well, not necessarily, and the reasons why are relatively straightforward.

The Economist has an interesting feature on how (mostly) Western multinational corporations derive an ever-smaller share of their revenues at home, while their headcounts and shareholders head in a similar direction. Of course you can use stock valuation methods such as price-earnings ratios, dividend discount models and what else have you to derive how much these stocks are worth, but the important thing to keep in mind is that a lot of MNC earnings will increasingly come abroad. So their home economies may go nowhere fast--think of North America, Western Europe and Japan--but their revenues may be unaffected or likely even grow as most gains come from international operations in developing countries and the like.

It's interesting stuff, and I'll have more on how MNCs hardly act in the national interest as most IPE scholars believe. While these MNCs may successfully lobby their home governments for economic and trade favors, governments do not have the same sway over MNCs.

Is IPE in Decline as a Field of Study?

Out of curiosity, I used the Google Ngram Viewer which records the number of instances a term appears in the books cataloged by the search giant (from the description, it works like a quantitative content analysis across all volumes indexed by Google). Here we can partially deduce the general awareness and popularity of "international political economy" as a field of study relative to closely related ones. I chose to compare IPE with "international politics "and "international economics." Meanwhile, I began the search from 1970 since most accounts date the emergence of the discipline to the first oil crisis of 1973.

Not to any real surprise, IPE still lags behind international politics and international economics in terms of book mentions (see chart below). As an IPE blogger, I myself understand that popular awareness of the discipline is, well, next to non-existent and I thus need to constantly explain what the field is about to those who stumble upon this blog somehow. Perhaps more troubling for us IPE scholars, book mentions of IPE have been falling since around 2002 as a percentage of all cataloged works. This is certainly an investigable question: why isn't IPE making more of a popular impact? Small-but-growing would have been nice; small-and-shrinking isn't. I would put it down to a lack of diversity in viewpoints among general IPE scholarship. For a discipline that considers itself both "interdisciplinary" and "international," it tends to feature too much output from the white malestream--what I call "White PE" [sic]. Not naming names, but the top journals in this field definitely have a [white, male] hegemony of a select few American and British universities talking to each other at academic conferences and calling it "international." If you are not part of their limited conversation and schooled in its abstruse nuances, well, tough luck.

I guess things have to change if we are ever going to attract a broader audience since what Benjamin Cohen calls "mid-level theorizing"--economics envy masquerading as IPE--has lost its relevance. This may shock the white malestream, but it seems not everyone is as fascinated with the concerns and perspectives of a precious few privileged folks who often do not speak any language other than English. The evidence is clear: IPE is in decline by this measure. I would attribute this to its failure to live up to its claims of being "interdisciplinary" and "international." IMHO, we need homegrown Asian theory emerging especially out of East, South and Southeast Asia. Genuine African perspectives would be welcome, too. Certainly, more scholarship out of the white malestream won't save us since the current state of Anglophone hegemony doesn't seem to be expanding the discipline. IPE, you have been warned: change your ways by really globalizing or fall into even greater obscurity.

Christopher Pissarides

A profile of the Nobel laureate.

Olympics, World Cup & F1's Last Hope - Authoritarianism

You'd be a fool to bet against Almaty hosting the 2022 Winter Games.

Talk about the relationship between sports and authoritarianism. Let me put it this way: the only countries now willing to host expensive marquee global sporting events--the Olympics, the World Cup and Formula One are authoritarian regimes. The proximate reason for this is that the cost of hosting these events keeps rising and rising. As they do, citizens in democracies are less and less willing to shoulder the costs. On this point, Yahoo! Fourth Place Medal has an interesting feature on how no democracies want to host the 2022 Winter Games:

Residents of Krakow, Poland overwhelmingly rejected the idea of hosting the 2022 Games, leading city officials to withdraw Krakow's bid on Monday. This follows Stockholm, Sweden's leaders' decision to withdraw; Munich, Germany's voters' rejection of an Olympic chase; and Davos/St. Moritz, Switzerland's defeat of a referendum on hosting the Games. For those keeping count, that's four of an original eight host cities which had considered hosting the Games.Two more cities' bids, while not technically dead, may as well be: Lviv, Ukraine [?!-ed.] is having real military issues and can't afford to waste time thinking about the Olympics, while Oslo, Norway's bid is floundering politically.

Who's left standing if all these democracies pull out of the running? At this rate, it's either going to be another Beijing Games (winter, not summer, edition) or Almaty, Kazakhstan where the people will just have to bear and grin it as tens of billions are poured into activities with presumably little public benefit:

It's no surprise, then, that the only two cities seriously still in the running for the 2022 Winter Games are Almaty, Kazakhstan and Beijing, China: two locales where the people don't get a choice in whether the Games come or not.

The most graphic example right now is Brazil. Just a few years ago, the rest of the world took it hosting the World Cup in 2014 and then the Summer Olympics in 2016 as a sign that it had arrived on the world stage. With Brazil's economy now stagnating as commodity prices have fallen, it looks to have had the winner's curse twice over as it won bids to host both these events and as violent protests are mounted nationwide. On one level, the question is whether these events will break even or make a profit. Past hosts are unpromising, Greece and Russia being particularly egregious examples. At another level, could these funds have been spent on more productive purposes? Their complaint is not an unreasonable one: in a poor country, why are vast public monies being wasted on stadiums that will go disused after these events are done instead of on health and education?

The explanation goes beyond sports. For many Brazilians, the Cup has become a symbol of the unfulfilled promise of an economic boom for this South American nation. But the boom has fizzled. And now the World Cup's $11.5 billion price tag—the most expensive ever—and a list of unfinished construction projects have become reminders of the shortcomings that many believe keep Brazil poor: overwhelming bureaucracy, corruption and shortsighted policy-making that prioritizes grand projects over needs like education and health care.

"It's an affront, in a country with so many deficiencies in basic needs, to organize a Cup in this way," said Alcyr Leme, a São Paulo investment manager and lifelong soccer fan. Mr. Leme has fond memories of going to see Brazilian legend Pelé play in the 1960s. But he plans to watch this Cup at home. Buying game tickets would only condone the waste, he said.

At this rate, the only ones who will be left to foot the tab are authoritarian regimes. China attempting to burnish its national standing through sporting performance needs little explanation. Russia spending an unfathomable $50 billion on the Sochi Winter Olympics (oligarchs' contributions are ultimately state-furnished) to show it has arrived then blowing it all away by inviting Western sanctions comes to mind. Speaking of which, the only genuinely "new" event on the Formula One calendar is the Sochi Grand Prix later this year since Russia hasn't hosted any races before.

What mainstream media pundits [1, 2, 3] miss is the role of sporting organizations in producing this fine mess. I believe that the International Olympic Committee (IOC), Fédération Internationale de Football Association (FIFA) and Fédération Internationale de l'Automobile (FIA) shoulder a significant part of the blame as well in setting their sights too high in terms of the requirements for hosting these events. They have become too used to dictators splurging vast sums on these boondoggles that democracies now balk at the expense. All three are rather mercurial and are definitely not transparent in the slightest.

Even in global sporting organizations, it appears good governance is very much the order of the day.

UPDATE: Having thought more about it, recall how the IOC managed Cold War tensions at its tail end by staging events behind the Iron Curtain: Moscow 1980 and Sarajevo 1984. By definition those were authoritarian hosts, so it may just be a return to Eighties form. Before you start breaking out the Flock of Seagulls, though, consider that spiraling costs are relatively new since the USSR and the former Yugoslavia were hardly rolling in the dough nearing their dissolution. And so they say: the more you love, the more you live.

Spies Like Us: USA, PRC and, er...'IBM'

The silly season is upon us once more in the spying biz as the US and China make tit-for-tat accusations about each others' covert activities. The US started the ball rolling with this nonsense by "indicting" five Chinese military men it believes are spying on American companies. At this point we learn of many things important already. First, it is obvious that the US government cares more about its corporations than us Internet users when it distinguishes purported corporate espionage (not OK) from NSA spying (perfectly OK). In America, I guess corporations have more rights than people do as the anti-globalization types say. Second, the Yanqui hypocrites have also been spying on Chinese companies, namely telecoms equipment makes Huawei:

One of the goals of the operation, code-named “Shotgiant,” was to find any links between Huawei and the People’s Liberation Army, one 2010 document made clear. But the plans went further: to exploit Huawei’s technology so that when the company sold equipment to other countries — including both allies and nations that avoid buying American products — the N.S.A. could roam through their computer and telephone networks to conduct surveillance and, if ordered by the president, offensive cyberoperations.

Third, it is well-known that so-called American allies France and Israel have run industrial espionage programs aimed at the US for longer than China--the only question is if they are more intrusive cumulatively speaking, and there is reason to believe that they are. Even if they are not, why is it that the United States doesn't put them in an even trickier situation by demanding that their spooks be handed over for prosecution? The US made the charges against China obviously not expecting that the PRC would actually hand them over. Having security alliances with France and Israel, on the other hand, would set different expectations.  

Ultimately, the losers from this horseplay may be none other than American corporations as China seeks to move away from US technology products. Bye-bye a market consisting of a fifth of humanity. First China moved to ban the use of the latest version of Microsoft Windows, 8 (which I use), in government installations over, you guessed it, "security" concerns after XP updates were discontinued. Having jettisoned US software, the next step involves harassing makers of hardware. After enduring endless hassles over Huawei being considered a proxy for the Chinese military--I doubt it--the PRC is now scrutinizing IBM servers for "security" lapses while asking financial institutions to use PRC servers instead:

The Chinese government is reviewing whether domestic banks’ reliance on high-end servers from International Business Machines Corp. (IBM) compromises the nation’s financial security, people familiar with the matter said, in an escalation of the dispute with the U.S. over spying claims. Government agencies, including the People’s Bank of China and the Ministry of Finance, are asking banks to remove the IBM servers and replace them with a local brand as part of a trial program, said the four people, who asked not to be identified because the review hasn’t been made public. 

By the same, ah, tortured logic Americans paint Huawei as an extension of PRC security apparatus--its founder used to work in the PLA--IBM is suspect presumably because it's a large US defense contractor. I can already guess what comes next. As it so happens, China's Lenovo is trying to buy IBM's low-end server business since Big Blue wants to get out of that low-margin business:

IBM announced in January it would sell its low-end server computer business to Beijing-based Lenovo Group Ltd. (992) for $2.3 billion. That transaction faces regulatory scrutiny including a U.S. national security review. Angela Lee, a Hong Kong-based spokeswoman for Lenovo, said she couldn’t immediately comment.

Under the proposed deal with Lenovo, IBM will keep its higher-end hardware, including System z mainframes and Power servers. Lenovo would get IBM servers that use x86 processors, an industry-standard technology. The transaction includes BladeCenter and Flex System blade-style servers -- slim devices that slide into racks -- along with switches that run corporate computer networks.

Nevermind that the low-end IBM servers use generic parts anyone else can buy. In this heated environment, I expect American politicians to raise "security" hackles over the proposed purchase. It will be even more silliness on top of so much that has already transpired. At any rate, I offer some takeaways:

1. Nobody is innocent here of spying over either "security" or "commercial espionage."
2. The US is doubly hypocritical in not charging its spying allies whose practices are indistinguishable from China's (or its own for that matter). 
3. The Americans are using "security" claims to paint China in a bad light.
4. The Chinese are using "security" claims an an excuse to eventually wean government procurement off US software and hardware. Since it's not a signatory to the WTO government procurement agreement, it has some legal cover--although don't be surprised if the US makes a WTO case if things get worse.
5. The real victims in this joint US-Chinese idiocy are firms more interested in trade and investment than participating in geopolitics. I honestly see no reason why the likes of Huawei and IBM would deliberately include spying equipment in their equipment sales to foreign governments, and there have been no documented cases of such equipment being bugged. 

Stupid is as stupid does.

More Piketty Readings

1. Jim Hamilton
2. Per Krusell and Tony Smith
3. James Galbraith
4. Update: Debraj Ray
5. Update: Larry Kotlikoff
6. Update: Jason Furman
7. Update: Francis Diebold
8. Update: Ben Mathew
9. Update: Mervyn King
10. Update: Matt Rognlie

As Asia Goes to Heck, Remember Factory Asia

The system of production spread throughout East/Southeast Asia has been dubbed "Factory Asia" as we make goods for the rest of the world. In doing so, we (or is it MNCs more accurately speaking?) take advantage of our comparative advantages in splitting production activities country by country. At its apex is Japan which makes leading-edge componentry, closely followed by manufacturing-oriented Asian tigers Singapore, South Korea and Taiwan that are very nearly at the cutting edge technology-wise. Next up are China, Malaysia and Thailand--sites that combine technical expertise with lower labor costs, followed by locations whose attractions are mainly lower costs of production--Indonesia, the Philippines and Vietnam. 

As with all good things however, I think "Factory Asia" as we know it is coming to an end as territorial disputes mean that politics disrupt economics. Witness Vietnamese rioters killing Chinese workers after the PRC's excursions in the Paracels. With Chinese roughhousing now blamed for the sinking of a Vietnamese fishing boat--it's amazing how Chinese "fishing boats" are used as paramilitary forces--I fear things will only get worse. The Philippines' case against Chinese territorial overreach further agitates the increasingly belligerent PRC. Meanwhile, other Southeast Asian nations with territorial disputes with China--namely, a majority of them--are becoming wary of PRC strong-arm tactics. On top of everything, Japan and China are locked into yet another territorial dispute over another set of rocks in the East China Sea. Being the two regional bigwigs, that one probably matters the most. In total, we may have reached the point of no return.
***

Anyway, I recently found a 2013 publication from the WTO commissioned in conjunction with the Temasek Foundation (funded by Singaporean sovereign wealth fund Temasek) and the Fung Global Institute that provides a lot of information on the operations of "Factory Asia" entitled Global Value Chains in a Changing World. It discusses how these chains no longer flow in one direction but are bidirectional between different countries in the Asian example.

To understand the difference between Asian and, say, North American production networks, consider this example taken from Funukari Kimura's contribution (chapter 15), "How Have Production Networks Changed Development Strategies in East Asia?" Having contributed a lot to the supply chain literature, Kimura adds more insights here into how these networks contrast with the maquiladoras of North America:

Some East Asian developing countries have been successful in starting up industrialization by fully utilizing the mechanics of production networks and they have now attained middle-income levels. Today, the issue has become how to make the transition from a middle-income to a fully developed economy. If we simply extrapolate GDP per capita, a number of East Asian developing countries including Malaysia, Thailand, China, Indonesia and the Philippines may reach US$ 10,000 or higher within 10 to 15 years. Such simplistic macroeconomic growth cannot be automatic. Indeed, it will certainly require substantial economic transformation.

The strength of East Asia lies in the formation of its industrial agglomerations. Production networks in the region have reached a new stage of development (Figure 15.5). Fragmentation of production between the United States and Mexico, on the other hand, mostly consists of “cross-border production sharing” in which transactions can be characterized mainly as simple “go and come back” ones, and these transactions remain typically intra-firm ones. Fragmentation between Western and  Eastern  Europe  has  so  far  remained  at  a  similar  stage  of  development.  Yet,in the case of East Asia, many countries and regions are involved, interlinked by a sophisticated combination of both intra-firm and arm’s length (inter-firm) transactions, and it has truly become a “network.” There is a tendency for intra-firm transactions to be long-distance ones while arm’s length transactions are limited to shorter distances due to high transaction costs (Kimura and Ando, 2005). This generates one of the major forces forming industrial agglomerations in East Asia.

Using conventional trade figures, admittedly a compromised source of data, how can we measure the emergence of this "Factory Asia"? See chapter one of Richard Baldwin who coined the term "second unbundling" to differentiate production stages being dispersed internationally from the "first unbundling" of production from the Global North to the Global South that was still accompanied by clustering effects of factories near each other in, say, the same urban areas of a particular nation. Quoth Baldwin:

One measure of supply chain internationalization focuses on products where nations are exporting and importing an extraordinary amount. This makes little sense from a first unbundling perspective; nations seem to have both a comparative advantage (extraordinarily large exports relative to other nations) and a comparative disadvantage (extraordinarily large imports relative to other nations). From a second unbundling perspective, the extent of such overlapping comparative advantage and disadvantage provides a proxy for global supply chains.

Thus the sum of such overlapping trade as a fraction of world manufacturing trade provides a conservative measure of supply chain trade. The evolution of this measure by region...is shown in Figure 1.3:

Going by Baldwin's figures, us Asians are (were?) far more integrated in a "second unbundling" sense that I despair is now under attack from jingoism and other idiocies. Ah, how the politics always intrudes on the economics, but I guess that's why we need an IPE Zone. I just hope "Factory Asia" won't fall apart as quickly as it rose because of these inane regional tussles. As always, my priority is development for all.