2. Chapter 7
The Uneasy Relationship between TNCs and States: Dynamics of Conflict and Collaboration

3. Review Concepts to Review Key Words: TNCs and GPNs
Role of states in globalization
Embeddedness
Key Words:
TNC/state relationships; locational flexibility; taxation and regulation of TNCs; integration and fragmentation; host country tactics

4. TNCs and States States and firms need each other
Fragmentation of GPNs has become common
states tend to be fearful about stability of TNC branches, leakage of tax revenues, and TNCs having moving out of the country.
It seems logical that TNCs would want the removal of all regulatory barriers; however, regulatory structures are an opportunity, stimulating competitive bidding
Relationship between states and TNCs is dynamic
Locational mobility

5. TNCs and Home/ Host Countries
Home countries
Some states view TNCs as extensions of state foreign policy
TNCs look to home-country governments to provide protection abroad
TNCs incorporate parts of national economies
Home-country trade policies can open up access to markets in foreign countries
Host countries
Have the power to limit or dismantle TNC manufacturing and trade networks with regulations and restrictions
Ultimate sanction: to exclude or appropriate a particular investment
After the initial investment has been made, balance of bargaining power shifts from TNCs to host country
Though this is limited in areas where technological change is frequent and/or global integration of operations is common

6. TNCs and Institutions Taxation Regulation
Lower taxes for TNCs are often an incentive for
location
Problematic issue: how a TNC’s internal transactions are taxed
The ability to set internal prices enables TNC to adjust transfer prices; it can be hard for governments to document the actual extent of this.
The greater the differences in corporate taxes, duties, tariffs, exchange rates, the greater is the incentive for TNCs to manipulate internal transfer prices
Regulation
No comparable body to the WTO for regulating TNCs
History of attempts to introduce international framework relating to FDI/TNCs
Main problem is the conflict of interest between TNCs, states, labour groups and CSOs

7. Embedding TNCs
TNCs wish to maximize locational flexibility to take advantages of differences between countries
Primary aim of a host state is to try to embed a TNC as strongly as possible
Two types of embeddedness:
Active embeddedness is when a TNC seeks out an asset and voluntarily incorporates it into its operations
Obligated embeddedness occurs when there is a localized asset which is important to a TNC and access to it is controlled by the state
The scarcer the resource, the greater the bargaining power of its controller and vice versa