Industrial Development Policy Discussion Paper 23

Globalisation and Corporate Power

Keith Cowling Philip R. Tomlinson

March, 2004

All Linstitute Discussion Papers are freely available online at: www.linstitute.org/papers/

Globalisation and Corporate Power*

Keith Cowling Department of Economics, University of Warwick Philip R. Tomlinson School of Management, University of Bath

This paper should be referenced as: Cowling, Keith and Tomlinson, Philip R. (2004), Globalisation and Corporate Power? Linstitute Discussion Paper 23, Universities of Birmingham, Ferrara and WisconsinMilwaukee.

Copyright Cowling and Tomlinson 2004

Correspondence Details: Keith Cowling Department of Economics, University of Warwick, Coventry CV4 7AL, UK Tel: +44 (0) 2476 523483 Email: K.G.Cowling@warwick.ac.uk Philip R. Tomlinson School of Management, University of Bath, Bath BA2 7AY, UK Tel: +44 (0) 1225 383789 Email: mnsprt@management.bath.ac.uk

Keywords: oligopoly, globalisation, corporate power, strategic decision making, strategic failure. JEL Codes: B52, D63, F23, G38

*We are grateful for comments and suggestions from Roger Sugden and participants at the plenary session of the European Union Network for Research into Industrial Policy (EUNIP) conference held in Turku, Finland, December 5th 2002.

Abstract
This paper seeks to establish a view of the world within which globalisation and corporate power interact and shape the nature of the modern market economy. Drawing upon a range of theory and evidence, we consider the implications of the growth of transnational firms and concentrated market structures within the advanced industrial countries. We conclude that the globalisation process (and the ensuing concentration of corporate power) has not met the wider interests of the global community: indeed it has contributed to a series of strategic failures throughout the world economy.

1. Introduction

This paper seeks to establish a view of the world within which globalisation and corporate power interact and shape the nature of the modern market economy. The focus will be upon the growth of giant firms and concentrated market structures within the advanced industrial countries, essentially the Triad, Western Europe, US and Japan, but the tentacles of this structure can be seen to extend to the rest of the world by a process of globalisation. A central feature of our analysis will be the link between oligopolistic structures and income shares, particularly the split between profits and wages. This is important not least because profits drive the system, but also because of the implications of the distribution of income for aggregate demand.

We begin our analysis by isolating the potential for the share of profits to increase as markets become more concentrated, as giant firms are created and become more dominant. We shall proceed by a process of interaction between theory and evidence (see Section 2), building in globalisation from the start by incorporating the rise in the transnational organisation of production and the resultant control of trade by the transnational giants: thus corporate power is not necessarily disciplined by the apparent growth in import competition (see Section 3). We should note that these corporations are controlled by corporate hierarchies from one centre of strategic decision-making: indeed, this is the essence of the modern corporation, where activities are often extended beyond the firms legal boundaries into sub-contracting, franchising, agency and joint ventures/strategic alliances (Cowling and Sugden, 1998). These corporations seek higher profits at both a domestic and an international level through strategic control over variables such as production, employment, investment and advertising. At a national and global level, the growth in corporate power also has implications for 3

relationships with governments and labour (see Section 4). The supply-side is thus established for a world dominated by giant corporations operating in oligopolistic markets.

We then turn to the demand side to examine whether or not the level of aggregate demand can be expected to allow the potential profits within the system to be actually realised (see Section 5). Specifically we shall examine the impact of rising concentration on components of aggregate demand, for example the impact of changes in income distribution, investment expenditures and demand management policies. These issues of the adequacy of effective demand and the realisation of profits are now returning to the centre stage; see, for example, Krugman (1999) for professional debate and the media, day-by-day, for popular debate. Finally, in Section (6), we raise the issue of strategic failure: a situation that occurs when strategic decisions on the key economic variables - are taken by corporate hierarchies, whose interests conflict with the wider public interest (Cowling and Sugden, 1994). We conclude that the current globalisation process and the ensuing concentration of corporate power have contributed to a series of strategic failures in the world economy.

2. Oligopoly, Transnationals and Profits

2.1. Oligopoly: an empirical phenomenon

It would appear that oligopolistic structures are generally ubiquitous in the modern economy - we observe them wherever we look. We may hasten to add that most industries that we might look at have large numbers of production units in any industrial country, but these large numbers are normally dominated and controlled by a few giant corporations. And, it will be maintained, the same is true when we also allow for international competition and socalled global markets: we can illustrate this proposition with a few interesting cases and we shall add further evidence as we move through the arguments1. The proposition has often been accepted with little argument within manufacturing, although probably less so today when many industrial commentators often refer to manufacturing product markets as being highly competitive and increasingly so. We shall argue that oligopolistic competition is of its nature very different to mainstream concepts of competition, but before doing so we shall
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We shall provide contemporary examples of market dominance, but shall not seek to provide anything comprehensive in the way of a full literature review. Rather, we are attempting to provide a framework within which the present literature may be organised, but also where future research may be directed.

briefly look at structures which appear sufficiently concentrated as to be characterised as competition among the few (Fellner, 1949), thereby implying a high degree of interdependence in decision-making.

Manufacturing, financial services, transport and energy, retailing, hospital services, the media, have all been subject to significant concentration tendencies in recent history, typically achieved via merger activity. The normal qualification made, and of course it is seen as a significant one, is that although major merger movements have taken place, their effect has been mitigated by the concomitant opening-up of national markets to international competition. We shall argue later that this position has got to be considerably qualified by a consideration of who controls the process of international trade and competition. However before moving in that direction we can give important and interesting examples of highly concentrated markets operating directly on the international level2. We have estimates of highly concentrated markets for the international trade in commodities - that is food and beverages, agricultural raw materials, minerals, ore and metals (Maizels, 1992). This control of a very significant proportion of international trade - of especial significance to many developing countries - rests with a very few, giant transnational corporations: as examples of particular significance to developing countries, the proportion of commodity trade marketed by 3-6 of the largest transnationals is 85-90% for coffee, 85% for cocoa beans, 85-90% for jute, 75-80% for tin. This dominant position of a few transnationals in the whole array of international commodity markets is rarely pointed out in the debates that revolve around access to markets in the developed world by the developing world: it is the governments of the developed world who are generally seen as the villain of the piece, when it is likely that the power of corporate giants in commodity markets is likely to be of similar significance in determining export earnings, and thus development strategies, in the developing countries.

Of perhaps more recent significance, on the world stage, is the evolution of concentration in the communications, information technology (IT) and media industries, together with important merger/consortia activity in those public utility industries recently privatised. Many have believed that the former industries have been opened up to the forces of global competition enabled via the application of new technologies, but perhaps we should not be so sanguine: there is increasing evidence that a few major corporations are emerging as
For other examples of increasing industrial concentration in manufacturing and services at the global level, see Dicken (2003).
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dominant players in these industries at the global level. For instance, the servicing of global IT networks run by global players in a variety of industries appears to have become the exclusive preserve of two or three service providers. We have also witnessed significant developments in telecommunications with global consortia emerging: during the late 1990s, there were a number of prominent mergers and strategic alliances involving the worlds major telecommunication companies (see Jamison, 1998). These developments are particularly significant since IT was considered, by many observers, as a means to nullify the effects of monopoly power. Furthermore, in their study of online markets, Daripa and Kapur (2001) conclude that claims that e-commerce will lead to more (price) competitive environments are overstated and that in many online markets, industrial structures are likely to become more concentrated. Indeed, recent discussions of the possible monopoly control of the Internet could completely undermine its democratic base (see Sugden, te Velde and Wilson, 2002).

We can infer at this point that oligopolistic structures generally prevail at some stage of the global production process: obviously a myriad of small production units exist, but they exist within a system dominated by relatively few giants. The implication is that we can expect a general divergence of prices from the competitive level. We shall now assess theoretical grounds and empirical evidence for the significance of this divergence, the factors underlying it and the consequences for profits, and thus for the broad distribution of income between capital and labour.

2.2. Price-Cost Margins, Collusion and Entry

Oligopoly theory allows us to say something about the mark up of price on cost in terms of the structure of the industry, the behaviour of consumers, and the inter-firm behaviour within the industry; yet all of these variables should be seen as subject to the strategic control of a few dominant firms operating within the market. We would not wish to go through all the analysis which underpins this sentence: it is the core of industrial organisation, both theory and empirics. However, we will pick up this theme as we work through the central theoretical arguments and empirical evidence. We now consider concentration, collusion and the price elasticity of demand, before considering the question of potential entry.

Consistent with profit maximization, the long run aim of firms is the effective monopolisation of specific industries via organic growth, merger or effective coordination with rivals. So long as industry output shows a departure from monopoly output there will be gains from coordination, whether or not they are appropriated depends on the costs of coordination, which has implications for the type of technology and organisational form. The direction of innovation will reflect the pursuit of efficiency, control over inputs and the pursuit of monopoly rents. Innovations favouring deconcentration will not be favoured by the dominant, who will seek to suppress such developments either through merger, strategic alliances and/or anti-competitive behaviour3.

Whilst seller concentration may impact on margins directly (the general Cournot result), it may also have a strong indirect effect through the ease of coordination and thus the associated decline in the costs of collusion: deviance is more easily controlled (Stigler, 1964, offers the seminal article which anticipated much of the later game theoretic work). The probability of detection of price cutting increases with concentration and thus the adherence to agreed prices is more likely. Stiglers work also suggests that lower concentration among buyers facilitates collusion among sellers: concentrated sellers and atomistic buyers offer the most conducive conditions for effective collusion. This reflects the situation in retailing: Dobson and Waterson (1997) demonstrate rising concentration and rising margins in UK retailing, and Claycombe (2000) concludes that concentration has a strong effect upon department store prices in the US. Similarly in the US, the price of hospital services is closely related to concentration (see Vita and Sacher, 1999), while Simpson (2001) detects little consumer switching in response to large price increases following hospital mergers.

Concentration will also influence the degree of collusion via its impact on retaliatory lags: the shorter the lag the more transient the gains from deviance, the less the incentive to deviate. This is likely to be affected by inter-firm communication (Williamson, 1965) and multimarket contact with familiarity breeding cooperation (Hughes and Oughton, 1993). The conclusion (paradoxically) is that rivalry and collusion generally coexist in concentrated markets closer rivalry, combined with short retaliatory lags, serving to maintain collusion. Here, the tit-for-tat strategy provides a useful interpretation of rivalry and collusion: it elicits and rewards the cooperation of others and does this by offering cooperation with

The examples in relation to the IT industries referred to in Section (2.1) are cases in point.

retaliation a speedy response to non-cooperation (yet forgiving equally rapidly) (see Axelrod, 1984, Cubbin, 1988). Competitive behaviour is then diverted away from price towards product and advertising competition, where retaliatory lags are longer. Thus strategic investment in the market enhances corporate power by creating islands of monopoly power literally so in the case of supermarkets investing in land banks, which, together with limited planning permission, create locational monopolies.

Finally, we raise the question of corporate control over consumer preferences: the elasticity of demand with respect to price has a ubiquitous presence in profit maximising conditions for firm output/pricing policies; almost as ubiquitous is the assumption that it is somehow exogenously determined. Yet, as Galbraith (1958) originally argued, advertising - in the broadest sense - provides a powerful instrument for creating and sustaining wants by creating psychological or even physiological dependence (the example that comes to mind is that of children and cigarette advertising). As a generality we would argue that advertising is a characteristic of corporate power and in turn sustains and enhances it4. Direct evidence linking advertising to the price elasticity of demand is rare, but what there is, is compelling. Pagoulatos and Sorensen (1986) report an analysis of the variation in the price elasticity of demand across US 4-digit industries within Food and Tobacco, and reveal a significant, negative relationship with the intensity of advertising, after controlling for R&D intensity, concentration, percentage of industry sales to final demand and the effective tariff rate. They conclude the empirical results are consistent with the hypothesis that demand elasticity is in part determined by the strategic behaviour of firms within an industry . Rather than being an exogenous element of market structure, demand structure is actually moulded to some degree by the nature of the conduct of firms (ibid, p.247)5.

Thus we have some support for the view that powerful corporations can act to create and sustain the market conditions necessary for the realisation of prices which depart substantially from competitive levels, but within mainstream economics we have seen a tendency to recognise concentrated industries, dominated by giant firms, and yet to argue for competitive

Naomi Klein (2000) would regard this as too crude, and demeaning of human behaviour, preferring to use arguments about the corporate occupation of public space: yet the bottom line is similar.
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Moreover, in her review of the evidence, Koutsoyiannis (1982, p133) concludes most of the available evidence supports the hypothesis that higher prices result from advertising. Such evidence is indicative of firms enhanced market power as a result of advertising and is supportive of the thesis advanced here.

or near competitive outcomes secured by the existence and consequences of credible potential entrants. Contestability can be seen as an extreme case and most economists now perhaps argue that although it may serve as an interesting bench-mark, the conditions for contestability are not generally realised (see Martin, 1989 and also Gilbert, 1989). Yet, the question arises are existing monopoly/oligopoly positions more apparent than real? Will our previous results be undermined by potential entry? Is rivalry and collusion undermined?

There is an enormous literature on entry-limiting pricing, but it is now generally recognised that capacity, in a variety of guises, gives a better signal of post-entry conditions than actual price (output): it is not what you are doing, but what you are capable of doing! Thus price can be expected to be invariant to entry conditions entry will be controlled strategically via investment: the threat of entry determines incumbents investment, not incumbents output (Blattner, 1972; Spence, 1977). There has been a debate about the conditions under which the Spence solution holds, but the central result appears to be maintained. However, the big issue is to extend the capacity approach to a more realistic view of what sort of potential entrant is of central importance. We need to consider the general concept of rivalry and collusion, previously discussed, as a potential, as well as presently existing: an important issue with entry is where a powerful existing firm in one market is considering invading a market dominated by another such firm, where the latter is a potential rival in the formers market (potential reciprocity). This is an important issue because of the flexibility of the modern corporation, in a geographical and product space sense. The deterrent to entry is the immediacy of expected retaliation, but this is conditional on the capacity to do so. This capacity will comprise a strategic capability, in terms of management, technology and marketing expertise an organisational competence. This fits in with the notion of the firm as being a strategic entity and applies to the transnational situation. Changing circumstances may result in entry, but the norm is typically live-and-let-live (Baran and Sweezy, 1966): collusive outcomes within oligopoly groups generally would not be undermined by potential entry. The conditions of the birth of British American Tobacco (BAT) is a case in point a threat to enter the market of Imperial Tobacco by American Tobacco led to the formation of a joint venture (BAT), to dominate the rest of the world! But we can take this tale a little further: excess capacity bolsters collusion since it makes it clear to participants that rivals can react immediately to deviance. Thus potential entry, which induces investment in excess capacity can result in a higher degree of collusion! It stands conventional wisdom on its head.

Obviously excess capacity is a burden, despite the strategic benefits: the question arises can the strategic benefits be retained whilst relieving the burden by use? The preconditions for use are those associated with price discrimination: if we see domestic and foreign markets to be segmented then excess capacity created for strategic purposes in domestic markets can be turned to export production, production which would not take place were it not for the existence of potential entry in the domestic market (Blattner, 1972). Evidence for the positive correlation between export performance and concentration/firm size is usually explained in terms of the efficiency of size, but the strategic explanation offers an alternative associated with the defence of a market position by large corporations in concentrated industries.

Compelling evidence on the existence of strategic entry deterrence is provided by a remarkable piece of research by Smiley (1988), which for a decade was pretty much unique. He did what other economists generally choose not to do - he went to those who make the decisions and asked them what they actually do! He surveyed brand managers in US industry and discovered, despite the numerous theoretical papers, that limit pricing was unimportant. It was excess capacity that was important, but not in the sense of physical production capacity: rather, advertising; R&D; marketing (brand proliferation); distribution were the dimensions of capacity of strategic interest to management. The result was the more remarkable in that you would guess there would be a response bias against admitting this. Similar results have since been obtained for the UK (see Singh, Utton, and Waterson, 1998). Also supportive is a study of Maxwell House Coffee, revealing attempts to secure extensive featuring of their product in grocery outlets as a strategic response to entry (Nelson and Hilke, 1991); a study of supermarkets in the UK revealing firms using store openings to preempt rivals (Smith, 2000), and a study of US ready-to-eat cereals, with incumbents using advertising to limit entry (Thomas, 1999). We draw the conclusion that potential competition cannot be expected to dominate actual competition (see also Geroski, 1995). However, our earlier analysis would suggest that active rivalry in concentrated markets will still lead to collusive outcomes. Indeed, the existence of potential entry, stimulating strategic entry deterrence, reinforces the earlier conclusion that rivalrous behaviour and apparent collusion coexist in concentrated markets by providing excess capacity, in a variety of dimensions, that helps sustain such a solution: a feedback loop sustaining, rather than undermining, the result

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for the fixed-numbers oligopoly outcome6. A further implication of our analysis of potential entry is that free trade can serve to preserve monopolies in domestic markets by reducing the costs of holding excess capacity: dominant firms can gain at the expense of others, free trade allows this, and international concentration increases the British beer market may be a case in point with the large vertically integrated British brewers/retailers (and their Continental counterparts) forcing out many smaller British brewers (see also Cook, 1997). Finally, we can recognise that potential rivalry forces firms into strategic expenditures they would otherwise choose not to make, thus reducing profitability. We would expect dominant firms to respond to low profits not by exit, as in a competitive world, but rather we would expect these firms to seek to modify their environment in order to raise the profitability of their investments they will seek to resolve their problems by strategic action, which might involve seeking to secure greater adherence to group norms (collusion rising with adversity), intensified search for monopoly positions (market niches) and intensified attempts to secure control over consumers. This is in line with our view that the modern corporation is a centre of strategic decision-making, guided by the search for profits. At the limit these firms will seek to influence the State in this quest (see Section 4.1).

3. International Competition and the Transnational Organisation of Production 3.1 International Oligopoly We shall now seek to look more directly at corporate power within oligopolistic structures open to international competition, paying particular attention to the implications of the transnational production systems, which have evolved under the control of the dominant corporations. Any analysis of the link between price-cost margins and market structure must consider the likely impact of international competition. However, we should guard against any quick judgement that a higher degree of import penetration implies a higher degree of competition, as signified by a fall in the mark-up of price on marginal cost. The central question we have to face is who controls such import penetration and, more generally, who controls the international pattern of production and trade within which corporate power is determined and sustained on a global basis.

It is also possible to imagine another feed back loop having similar effects: if product differentiation is one of the dimensions of excess capacity then we may expect that the price elasticity of demand will also be reduced in the process, which, in turn, may favour a high degree of collusion within the incumbent oligopoly group (see Hckner et al, 1994).

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Consider rivalry and collusion in an international context. Recall that close and immediate rivalry sustains collusion price-cutting will not take place when the response by rivals is expected to be substantial and immediate. Thus close rivalry is consistent with substantial departures from competitive prices. If international (potential) rivalry is symmetrical when markets are opened up, international collusion and price-cost margins can be expected to be maintained; the reciprocity of potential entry, given symmetry, can be expected to prevail. This echoes the case of Imperial Tobacco and American Tobacco discussed earlier: not only does mutual entry not take place, but also cooperation and collusion may be enhanced in terms of new ventures and strategic alliances (see also Chen, 2003)7. But what is likely to happen as we open-up markets to international trade where asymmetries exist, for example, as a result of unequal development between countries? Consider Japan during its period of global expansion since the 1960s. It appeared to be the case that Japan took an aggressive stance over market share in a number of industries, with motor vehicles being a well-known and very significant case. However, there is no evidence that Japanese auto firms sought to achieve this purely on price competition rather product innovation and advertising were the chosen means of advance, likely because of the expected longer retaliatory lags associated with these strategies. Japanese vehicle producers rapidly filled-up product characteristics space via a proliferation of brands/models (see Cowling and Sugden, 1989). Since such strategies can be considered the norm across a range of oligopolistic markets, and such structures are pretty ubiquitous, as we have sought to argue, it would seem that we could generally maintain that price-cost margins may be sustained or enhanced (via the impact of non-price strategies), yet market shares may change substantially. Thus the general conclusion is that, whether symmetric or asymmetric, international rivalry can occur without an erosion of price-cost margins. This seems quite an important point that we believe has a general validity.

3.2 A Transnational Production System

There remains the more fundamental question of who controls imports and the appropriate measure of concentration in markets subject to international rivalry. Clearly market
Strategic alliances between firms are increasingly prevalent in the global economy (see Dicken, 2003). In addition to those emerging in global telecommunications (see Section 2.1), we also note those existing in the airline industry, where the major carriers have joined either the One World or the Star Alliance. These alliances have led to concerns that competition and consumer choice have been significantly curtailed on the major international routes (Consumers Association, 11/5/99).
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concentration, which is normally measured on a domestic basis in the Census of Production Reports, has to be adjusted for imports, where these exist. The typical adjustment made is simply to add on import expenditure to the denominator of the concentration ratio, this being the measure of concentration normally reported. Inevitably measured concentration declines as imports increase and economists talk about a greater degree of competition in the market. It is not normally recognised that this is by assumption: the top firms are assumed to have less market control as imports increase. The correct adjustment of concentration ratios requires us to distinguish two types of import: those controlled or not-controlled by dominant firms, where dominance is related to control over domestic production and/or imports it is possible to have dominant firms in any domestic market which are purely importers. Thus, as imports increase the correct measure of concentration can fall, rise or remain constant, depending on who controls international trade: the nature of adjustment of the concentration measure matters!

In a global, oligopolistic world, we can no longer simply think of arms length trade by trading partners: the tentacles of control over production and trade extend across international boundaries and we can make entirely wrong inferences about the nature of competition in the global economy if this is not recognised. However the correct adjustment of concentration is difficult: it is important to take account of who controls imports, and that is not normally published information by national statistical offices. Nevertheless, in one significant market, information is generally available Motor Vehicles. Thus we are able to calibrate the importance of adjusting correctly for import competition (Cowling, Yusof and Vernon, 2000). These results reveal that doing the correct adjustment is very significant: for the UK vehicle markets (cars; vans; trucks and buses) the reductions in concentration since the early 1970s as suggested by regarding imports as competitive is a very misleading picture. There has indeed been a massive increase in imports since the early 70s, but this has not led to a decrease in concentration, when correctly measured! If this result is anything like typical then we can concur that growing imports do not imply rising competition (and falling price-cost margins) in a transnational world.

This sort of evidence also receives support from measures of ownership links in trade. Such measures are difficult to obtain, but what we have is revealing. Hipple (1990), for instance, reports that 99.4% of US trade involves transnational corporations, 36.6% of US imports being intra-firm, defined in terms of ownership links (overseas subsidiaries). More generally, 13

transnationals account for around two-thirds of the worlds exports, with approximately onethird of world trade being intra-firm (Dicken, p. 53, 2003). Yet, such data will generally understate control, since this can be achieved without direct ownership: for instance through subcontracting, agency and franchise arrangements. For example, a jacket purchased in Next, a prominent clothes retailer in the UK, had a label to the effect This garment has been exclusively designed by Next. Every part of its development and manufacture has been controlled to ensure our high quality, modern design and value for money. The jacket was manufactured in Hong Kong by a subcontractor (for an interesting analysis of this sort of modern global system of production and control, see Feenstra, 1998).

The Next example illustrates how the dominant firm (it can be a retailer) can act strategically to incorporate the market, thus extending the ambit of the modern corporation. The observation has encouraged some to redefine the essence of the firm, in the form of the modern corporation, which dominates the global production system. For instance, Cowling and Sugden (1998, p. 67) state that a modern, large corporation is the means of coordinating production from one centre of strategic decision-making: whether transactions are market or non-market is not the issue. This may be seen as re-establishing the essence of Coase (1937) in his seminal article over sixty years ago: he saw firms as islands of economic planning the notion of planning was at the heart of production in a firm.

If we view a firm in this way there is an important interaction between a firm's strategy and moves toward free trade: we can see free trade as inducing the development of a transnational base by dominant firms, basically because more degrees of freedom are available to the firm. It can be seen as a response to a threat, in terms of oligopolistic strategy: threat and counterthreat allow dominant firms to accommodate each other (reciprocity), whilst squeezing-out weaker, smaller domestic rivals. It can also be seen as a response to an opportunity for access to lower costs, where wages and supplier prices are determined in bargaining, since the firm has created a credible inside option to switch production to an alternative supplier/location: a strategy known as divide and rule (Cowling and Sugden, 1994). The free trade, transnationality interaction has, therefore, at least two elements of endogeneity: transnational corporations have an incentive to pursue free trade policies and can be expected to do so in the political arena, and costs can be seen as endogenous to the development of a transnational strategy by corporations (see also Section 4.1).

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Our conclusion in this section is that moves to free trade and the growth of transnationalism which are themselves connected phenomena - especially in the modern world where developments in transport, communications and production technology facilitate it - will not generally undermine the tendency for price-cost margins to increase in specific markets defined at the appropriate level for the final consumer, whether international, national, regional or local. We can briefly report some additional evidence on the UK economy as a whole. The overall price-marginal cost margin over the period of the 1960s, 70s and 80s showed no propensity to decrease over time (in fact it rose!) despite a dramatic increase in import penetration (see Conyon, 1992). If one believes that imports are an important discipline on markets, then this result should appear pretty remarkable: price-cost margins apparently, have not been compressed by international "competition". What is being suggested here is that the key to understanding this data is the transnational extension of dominant firms and the formation of tacitly colluding international groups, strategically controlling global production and trade flows (see Dicken, 2003, Hipple, 1990)8. 4. Corporate Power, the State and Labour 4.1. Corporate Power and the State The growth of corporate power has also raised concerns about the ability of the nation state to pursue policies that although in the public interest, may be detrimental to large business interests. Indeed, government policy can be and is often shaped by the interests of the corporate sector. Since this statement might first appear somewhat controversial, we shall elaborate further with some examples9. For instance, since the late 1970s there has been increasing (business) pressure for governments to curtail the activities of trade unions and weaken labour militancy. In the UK, this pressure led to successive Conservative governments whose party was heavily funded by the corporate sector enacting a range of new employment legislation that sought to restrict the ability of trade unions to organise effectively. The legislation was complemented with moves towards a more liberal economic policy agenda - such as privatisation, the contracting out of state services and the
There is also political-economic evidence: British entry into the EEC received unanimous support from members of the Confederation of British Industry, the large employers, when this might not have been expected if they thought that the consequent increased competition would have reduced profits, at least for some; more recently entry into the EU was favoured by dominant Swedish firms, and the Single Market is revealed as the project of the big transnationals (Ramsey, 1990). Finally most surveys have consistently indicated that the majority of British firms favour adoption of the EURO. 9 For a fascinating account of the influence of the corporate sector upon the state and polity in the UK, see Monbiot (2000).
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abandonment of full employment policies - which had the effect of weakening the bargaining power of workers (see Thornley and Coffey, 1999).

Another example has been the influence of corporate interests in the design and implementation of regulatory policy. There is a large literature on regulatory capture, which suggests that the behaviour of the regulators will largely reflect the interests of the regulated. Helen Mercer (1995) has in fact looked at the UK archives: on this basis she contends that British antitrust policies have been shaped by the strategies of powerful business interests. Finally, we might also note that one of the consequences of the election of the Bush Administration in 2001 was a reversal of US policy to ratify the international Kyoto Agreement on environmental policy. Given that the Bush campaign was largely funded by the US oil industry, we might draw the obvious inference (The Guardian, 27/4/2001).

The growing influence of corporate power over the state should be seen in the context of globalisation and going in hand in hand with the emergence of the transnational corporation as the dominant business entity. We noted in Section (3.2), that the transnational base of the corporation provides it with significant leverage in bargaining situations. Such leverage can be applied against nation states, since it is often the case that transnationals bargain with governments over measures that enable them to increase their profits. Such measures may include the introduction and maintenance of favourable investment subsidies, infrastructural support, employment legislation and tax regimes. Since there are often political rewards in attracting and retaining transnational investment, governments are often compelled to accommodate such measures. This is because transnationals often hold the upper hand in such negotiations, since they can credibly threaten to use their inside option and invest/produce elsewhere (i.e. divide and rule). There are numerous examples of transnationals using their bargaining powers vis--vis governments in such a way: both Cowling and Sugden (1994, p.75-76) and, more recently, Dicken (2003, p. 304-312) provide details of illustrative case studies. Moreover, we are observing increasing incentive competition between countries, regions and localities for transnational investments10. Such competitive pressures undoubtedly place a strain upon the states fiscal resources, which may not necessarily be replenished through higher corporation tax revenues, which are usually

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For further details, including an extensive survey of incentives offered by nation states to transnationals, see UNCTAD (1996).

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anticipated by attracting inward investment: the transnational base of the corporation facilitates the use of transfer pricing allowing them to minimise their global tax liabilities11.

Finally, we might note that we are also witnessing increasing attempts by the corporate sector to secure appropriate policy changes at the supra-national level. For instance, the so-called Trilateral Commission is a global pressure group for free trade and the free movement of capital with strong representation from some of the largest transnational corporations (Marchak, 1993). In the 1990s, it was one of the main sponsors of moves in favour of nation states becoming signatories to a Multilateral Agreement on Investment (MAI); an international treaty that, if ratified, would have afforded transnational corporations even greater protection of their strategic interests, which went as far as providing them with the legal opportunity to successfully challenge the laws of nation states (Monbiot, 2000, p. 306). We can concur then, that globalisation and the growth of transnationals have a tendency to undermine democracy at all levels: local, national and supra-national. It is clear that policies, which are seen as detrimental to large corporate interests, are positively discouraged. Indeed they are often submerged in favour of alternatives consistent with the neo-liberal agenda.

4.2. Corporate Power and Labour In a similar vein, the corporate sector has been able to attain an enhanced bargaining position vis--vis its labour force. This enhanced bargaining position has been achieved through increased corporate pressure upon governments to change employment legislation (see above), combined with appropriate corporate strategic action as a response to the rising tide of trade union power that grew rapidly during the so-called Golden Age, from the 1950s to the middle of the 1970s, which raised problems of managerial control over production, particularly in the large manufacturing plants. The strategic corporate response, starting in the 1970s, and continuing today, was the fragmentation of production through multi-plant operations, a wider use of subcontracting and franchising. Yet this occurred within a system of strategic control over the location and organisation of production: a centrifugal movement of production (out from the Core), coupled with a centripetal movement of control (drawing the reins of control to the Centre). In essence, a new putting-out system has emerged, where

Not surprisingly, evidence on cases of transfer pricing is difficult to obtain. Nevertheless, Dicken (2003, p.283) reports a US study where more than half of 40 foreign firms surveyed had paid virtually no taxes over a 10 year period, with an estimated $35 billion being lost to transfer pricing. Similarly a study of 210 transnationals in the UK revealed that 83% had been involved in a transfer pricing dispute (ibid).

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the production unit is small, but which operates within a system of production controlled by the corporate giant from one centre of strategic decision-making.

Production was shifted increasingly to Greenfield sites away from organised labour, initially on a regional basis within countries, but increasingly of a global dimension: for example, production and jobs moved from the North-East of the US to the South in the 1980s and 1990s, and with the development of the North American Free Trade Area (NAFTA), the movement has extended south of the border into Mexico, and ultimately still further south in to Latin America as NAFTA is expanded. Whilst unions may try to respond to such changes, it is clearly difficult for them to organise within a fragmented system: corporations must simply coordinate to achieve their strategic objectives, unions must actively cooperate. And cooperation between unions is particularly difficult transnationally, where differences in history, culture and language prevail.

Divide and rule has become an effective tactic for corporations to reduce their labour costs: the credible threat of relocation nullifies any potential labour militancy, since workers place a positive utility on attaining/retaining employment. Again, there is a substantive mix of evidence from around the globe to suggest that the corporate sector has adopted such a strategy. In an early international survey of multi-plant firms, Scherer et.al (1975, p.278-279) recognised the important benefits that multi-plant operations afforded firms. Significantly, these authors also noted that firms with only a single plantwere penalised by lessened bargaining power in dealing with unions (ibid, p.279), suggesting that multi-plant operations provided firms with a useful tool to bargain effectively with workers. A recent econometric study by Addison et.al (2003), using data on UK multi-plant firms, found that, in the 1990s, plants were more likely to be closed where there was a strong trade union presence. In single plant firms, trade union activity was found to have no such effect upon the decision to close a production facility. This result would appear consistent with the divide and rule hypothesis since multi-plant firms are able to carry out their threat and close facilities, where there is a strong possibility of labour militancy. Finally, in the case of Japan, Coffey and Tomlinson (2003, p. 13-14) note that the large Japanese car assemblers have long used domestic subcontracting and more recently global outsourcing to divide and control their labour force and consequently reduce their wage costs. At the transnational level, Peoples and Sugden (2001, p.181-188), provide examples of specific case studies and draw upon empirical evidence from the UK, the USA and Canada to highlight the extent to which divide and rule 18

occurs. They conclude that the strategy is a significant factor in a firms decision to produce in more than one country (ibid, p.189).

The consequences of transnational production and the divide and rule of labour can be considerable. To begin with divide and rule places downward pressure upon wage levels across the globe12. The US economy is a clear example, where real wages were almost stationary over a twenty-year period up to the mid-1990s. A similar situation has occurred in the UK, where the lowest paid workers (typically those workers in relatively insecure employment) hardly benefited at all from any real wage growth in the economy over a similar period (Griffith and Wall, 2001; p. 346; Thornley, 2003). Consequently, in both countries, we have witnessed widening levels of inequality, which Faux and Mishel (2000 p.102) argue is primarily a result of a shift of income from wages to capital income (profits and interest) and also a growing inequality among wage earners13.

Deindustrialisation and economic stagnation is also a real concern: since transnationals can relocate to alternative sites when faced with rising labour costs, regions and localities can become deprived of employment and investment. Across the industrialised world, we have numerous examples of the hollowing out of industries as a consequence of transnationals pursuing their own strategic interests and lower labour costs: Sweden and Japan being recent and relevant cases in point (see Blomstrm and Kokko, 1997, Cowling and Tomlinson, 2000). Such a process is more likely in integrated markets such as NAFTA and the EU and with freer trade agreements, since it is easier for transnationals to co-ordinate a strategic response to any labour militancy.

12

Formal modelling of the opening-up of economies to foreign trade and transnational production shows that wages are driven down to reservation wages, whereas opening-up of economies to just foreign trade generally implies that real wages can rise or fall - since wages will fall, but prices may also fall. By facilitating a divide and rule strategy, the transnational control of production is crucial to the unambiguous fall in real wages (Hollingsworth (1997)). For less formal, but very interesting, case studies covering a variety of countries, Canada; Australia; UK; US; Sweden; East Asia; France; Germany; Japan and Lain America, which appear broadly supportive of the thesis advanced here, see Dunning (1997).

13

Again Dicken (2003, p.531) provides a reliable source of evidence: between 1979 and 1995, the ratio of earnings of the highest 10% of workers to that of the lowest 10 % rose from 3.2 to 4.4 in the US and 2.4 to 3.4 in the UK. In the US, the top 5% of American families captured 99% of the nations per capita gain in GDP (Kapstein, 1999, p.101).

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We would infer at this point that greater corporate power, enhanced by freer trade and transnational production, promotes the leverage of the major corporations vis--vis labour and government, at various levels: indeed corporate power, free trade and transnationality are endogenous to that leverage. Consequently there has been increasing political and fiscal pressures upon nation states, downward pressure upon wages and rising income inequalities. These pressures impact upon the level of effective demand in the economy, an issue to which we now turn.

5. Demand Side Issues

Our previous analysis relates to the supply-side of the global system: we have argued that the monopolisation of markets has resulted in the increase in the share of profits, a decline in the share of wages, and that the growth of international "competition", under the control of the transnational corporations, may enhance the tendency, rather than detracting from it. However, the increase in corporate power may leave problems on the demand side; although the supply side may dictate the growth in profit share, as a potential, the lack of aggregate demand may leave problems associated with the realisation of those profits. Indeed, a system which changes the balance between capital and employment income may have aggregate demand effects which are often ignored in current economic debates, but which were previously seen as central elements of macroeconomic debate. For instance, a process of deindustrialisation combined with stagnant and falling real wages for a significant proportion of the population and rising income inequalities is likely to depress domestic consumption levels. While consumption may be temporarily maintained by induced reductions in the household propensity to save combined with increases in household debt levels, such measures are unlikely to be sustainable in the long run14. Indeed rising household debt levels are likely to exacerbate any realisation crisis, as evident in the economic downtown in the US and the UK, during the early 1990s. If we expect the aggregate propensity to consume to fall as the income flow switches away from wages towards profits, then what happens to investment spending and government demand become central issues. We shall now examine these demand side factors in a world of rising corporate power.

14

We should note that we already observe a low propensity to save of households (Ruggles, 1993) and therefore the potential for further reductions in household saving to augment consumption levels is limited. Indeed, Banks et.al (2001, p.2) report from the British Household Panel Study that half the sample had savings of less than 600, equivalent to less than two weeks spending by the average household.

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In his survey of empirical investment functions, Chirinko (1993, p.1909) concludes with the observation that The response of investment to price variables tends to be small and unimportant relative to quantity variables, and to this extent the effect of the rise of corporate power on product prices relative to wages is not going to have much impact the key issue is to ensure capacity utilisation is maintained at a high level. However, despite this evidence, things appear to be changing domestic investment may be increasingly disconnected from domestic demand. Firms are increasingly serving global markets from least cost locations, so that the location of investment, and wage rates at that location, are now significant issues: local investment will be connected with local costs rather than local demand! In a world where transnational corporations increasingly dominate investment decisions, the location of investment has to be modelled in the context of the firm as a (potential) global entity. This has not been done in the past, although some recent econometric studies have attempted to do so. In the case of the UK, Young (1999) finds that UK average costs relative to the OECD countries was significant in explaining UK investment, suggesting that international cost differentials are a significant factor. This study receives support in Hatzius (2000) which finds for both the UK and Germany - the elasticity of investment with respect to unit labour costs has risen significantly since the liberalisation of FDI in the 1970s. Finally, Tomlinson (2002) finds evidence that investment in Japans domestic machinery industries is sensitive to changes in foreign wage costs. Such evidence may suggest that traditional investment functions are miss-specified and Chirinko's conclusions may no longer be appropriate. Investment demand in the national economy is determined by transnational forces managed by transnational corporations and as such, becomes more unstable.

If investment is problematic, then maybe other factors can sustain aggregate demand: for instance, foreign demand and demand by government. In the case of net exports, the empirical results are ambiguous: as concentration increases exports may grow, but there is usually a counter rise in imports (Koo and Martin, 1984). The budget deficit could be seen as a way of resolving a potential demand crisis: in the short-run a demand deficiency can be remedied by an expansionary fiscal policy, but such policies will be politically contestable and unsustainable. Within the so-called Golden Age, the quarter century following World War 2, there appeared to be a commitment to full employment by all parties, which was supported by international agreements such as Bretton Woods. Yet, a full employment policy had dynamic consequences: it led to a shift in the balance of power favouring labour. 21

Whereas before, the threat of dismissal was an effective discipline in bargaining with labour, the commitment to full employment nullified this threat, which in turn led to accelerating wage inflation and a shift of income from profits to wages. In response, the corporate sector retreated from Keynes, and pursued a campaign for a more liberal policy agenda at both national and global levels (see Section 4.1). As full employment policies were gradually abandoned, governments were faced with various social welfare constraints, which in turn created a crisis for public finances: an unplanned consequence of general stagnation. The conclusion has to be that there is no easy way out of a realisation crisis via state intervention in demand. This is not to say that demand management is not an important tool of policy, indeed one that is becoming more important in a globalised world economy (see Krugman, 1999), but it is incomplete. Globalisation tendencies render demand management more problematic, in so far as it tends to be based on the nation state. For instance, an expansionary policy will tend to generate balance of payments deficits more quickly and fiscal crises more generally, since any domestic expansion in aggregate demand can be satisfied by transnationals using global outsourcing: a scenario that is currently being experienced in the US, where the growth in output has not been paralleled by a growth in employment. So while the nation state bears the cost of demand expansion, it receives only a fraction of the benefits. Governments quickly learn that fiscal stimulus can lead to fiscal problems and consequently refrain from expansionary fiscal policy. The commitment to full employment is weakened. This does not mean that Keynesian policy is ineffective, but the world has to be reorganised for such policies to be feasible. This is a long way off, and for the present reliable tools for alleviating demand side crises appear significantly reduced.

6. Concluding Comments In this paper we have identified some of the consequences of the growth of corporate power within a global system of production controlled to a large extent by that corporate power. Most countries today, actively or by default, have given a prominent role to large, transnational corporations in shaping their own economic, political and social development. If we have an economic and industrial strategy, it is the strategy of the large transnationals. It is our view that this raises fundamental problems primarily one of a conflict of interests between the aims and objectives of the corporate sector and the general welfare of society. The principle issue is strategic failure: a failure to guide the evolution of the economy in the public interest. We have numerous examples of strategic failures: the crisis of unemployment in Western Europe continues, the United States seems to have a newly 22

emerging corporate crisis, the so-called Developing World continues to under-perform, Japan and the Pacific Rim seem to have lost their former vitality, the Russian crisis, the Argentinean crisis and the Brazilian crisis.

There has been increasing public discontent with the globalisation process and the effects of the global concentration of corporate power. The rise of the anti-globalisation movement and various international public protests at events such as the meeting of the WTO in Seattle, are a testament to the view that not all is well with the global economy. We have also seen the emergence of the World Social Forum that aims to promote greater equality of wealth and protection of the environment through dialogue with the global neo-liberal institutions such the IMF, WTO and World Bank. At the micro-level, consumer groups and anti-globalisation protesters have become more vigilant and have begun to use targeted campaigns against highprofile transnationals that have profited from employing poor labour standards or through polluting the environment. Fearful of adverse publicity many global companies have responded by redefining their ethical values or undertaken to sponsor community based projects under the guise of corporate social responsibility. Globalisation and corporate power have emerged at the forefront of the political agenda. Yet, as we have demonstrated throughout this paper, control of the global policy agenda has become increasingly concentrated within the corporate sector and, as such, is unlikely to be easily relinquished. While some concessions may occasionally be made to the international community, they are unlikely to go far enough to reverse the present shape of the globalisation process. Furthermore, corporate social responsibility is itself no substitute for a proper regulatory framework and public support for essential services and welfare: company ethics and sponsored projects are initiated in the (short-term) strategic interests of the corporation and can and are often withdrawn at their own choosing (see Hertz, 2001). One hopeful consequence of the rising discontent with the increasing number of gaps in the economic and social infrastructure induced by rising globalisation and the related disengagement of the state, has been the emergence of a new phenomenon, that of a social enterprise activity, entrepreneurship with a social mission now engaging nearly 7% of UK working age adults (Harding & Cowling, 2004). Importantly, the emergence of these social firms has been led by the very people most disadvantaged by these global changes.

We conclude that development paths chosen by the dominant transnationals have not met the wider interests of the global community: indeed they raise the spectre of strategic failure. It 23

is our view that overcoming strategic failure can only be achieved by a fundamental change in attitudes to public and industrial policy one that involves seeking to diffuse the strategic decision-making power of the corporate elites. This, in itself, is an enormous challenge for both academics and policy makers. Yet to do nothing or to ignore such a challenge is to allow society to be swept along by forces beyond its control, which puts a question mark against democracy itself.

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