Capital Beyond Borders: States and Firms in the Auto Industry, 1960-1994

Journal of Interamerican Studies and World Affairs, Fall 1999 by Arbix, Glauco

Thomas, Kenneth P. Capital Beyond Borders: States and Firms in the Auto Industry, 1960-1994. New York: St. Martin's Press, 1997. Tables, map, notes, bibliography, index, 191 pp.; hardcover $55.

Multinational companies are growing stronger over time. They move confidently around a borderless world as purveyors of capital, technology, and the promise of good jobs. In the perspective of most of the world's states, these multinationals offer developing countries a cloak of modernity. The stimulus they receive to develop their factories often includes mega-incentives and official benefits. Few governments, whether democratic or authoritarian, neoliberal or socialist, refuse to participate in the inevitable conflict with rival states to attract these investors. It is not surprising, then, that the investments of multinationals have become the most desired objects among national states at the end of the twentieth century.

Kenneth Thomas's book reminds us that the multinationals' capacity to fix and alter the location of their productive capital grants them enormous advantages in their negotiations with national states and with their own workers. As Thomas argues, the growing mobility of the multinationals erodes the power of states, diminishing their capacity to maintain leverage in negotiations at the federal, municipal, and international levels.

Capital mobility must not be confused with "movement of capital." Many economists conflate these concepts as the ability of capital to travel the planet in search of higher rates of return. The central question, however, should be how negotiations between states and multinational firms focus on the goal of locking in benefits for foreign capital in ways that are always geared to protecting monopolistic-oligopolistic competition and not the more open kind. Thomas tries to explain the mobility of capital; that is, the power to transfer, coordinate, and install capital investment geographically. It is the power to move capital and not the actual movement of capital that causes markets to change and constrains government choices.

Thomas's arguments are based on studies of the automobile industry in the United States, Great Britain, and Canada. As an oligopolistic sector par excellence, the auto industry has a long history of flexing its economic muscles in negotiations with states. The sector's bargaining power remains enormous, as the industry employs millions of workers who work directly for assemblers or autoparts suppliers. According to an estimate published in Fortune in 1995, 13 of the 50 largest firms in the world are auto multinationals. And although it is one hundred years old, the industry continues to develop advanced technology and employ the most modem organizational techniques.

Over the last 30 years, competition has increased in the auto sector, but states have granted more generous incentives to attract multinational investments in the industry. Governments have proceeded with such incentives knowing that the multinationals will always side with their subsidiaries in disputes with states. The multinationals remain much more preoccupied with their global standing than with the economic development of the countries in which they are installed. These firms will simply move to other countries when domestic markets shrink, or they will cease to invest during downturns. The latter occurred in Argentina in the 1980s, with negative consequences. Despite these threats, governments in the developing world still do not hesitate to grant incentives to the automakers.

In attempting to explain this paradox, Thomas describes the current international political economy as one of disequilibria, in which the mobility of capital grants the multinationals several kinds of leverage over states. It increases the range of strategic options for firms. It allows the multinationals to exercise credible threats not to invest or to pull out if their demands are not met. It diminishes the power of state sanctions over firms. It externalizes the provision of certain goods (infrastructure, finance, equipment) and, in the context of competitive incentive schemes across national and subnational governments, it forces these governments to provide those goods or lose the investment.

Capital mobility allows multinationals to move to areas of the world with weak unions so that they might hold labor costs down. One infamous case in the United States is General Motors' "southern strategy." Finally, capital mobility helps multinationals practice transfer pricing in intrafirm trade-sales within the firm across borders to avoid paying taxes and to facilitate the expatriation or repatriation of capital. Thomas argues that the latter is no marginal phenomenon. In the United States alone, intrafirm trade composed 33 percent of total exports and 37 percent of total imports between 1977 and 1994. In global commerce, intrafirm trade accounted for 20 percent of trade in 1990.

These capacities are the root causes of what Thomas sees as a secular shift toward more generous official incentives by governments over the last 35 years. Even in developing countries such as Brazil, Argentina, and India, there is much evidence that these trends persist (see Humphrey et al. 1998). In many of these cases, the terms of agreements between multinational firms and governments have come to public light only after judicial proceedings; the vast majority remain secret.