Strategic trade theory and the use of performance requirements to negotiate with multinational corporations in the third world: Exploring a “new” political economy of north-south relations in trade and foreign investment

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Abstract
The climate of foreign direct investment in the Third World shows unprecedented signs of welcome for multinational corporations: more less-developed countries (LDCs) are attempting to incorporate foreign investment into their 5-year plans than ever before; tax rates on international companies are dropping in Asia, Latin America, even Africa; governmental restrictions on multinationals are loosening in dramatic fashion. ∗ 1For quantitative measurements, see A. E. Safarian, "Firm and government strategies," in B. Burgenmeier and J. Macchielli, ed., Marltinationals and Europe 1992: Strategies for the Future (New York, Routledge, 1990), pp. 187-203. "Tax Policy and Reform for Foreign Direct Investment in Developing Countries," Fiscal Affairs Department, International Monetary Fund, IMF Working Pap, July 1990. View all notes There is one exception to the liberalizing trendy however: the imposition of performance requirements on foreign manufacturing investors. ∗ 2Farok J. Contractor, "Do Government Policies Toward Foreign Investment Matter? An Empirical Investigation of the Link Between National Policies and FDI Flows:' Working Paper #90-15, Graduate School of Management, Rutgers University, July 1990, Table 2. See also United States Trade Representative TRIM Survey (1989), Appendix E, in Theodore H. Moran, The Impact of Eade-Related Investment Measures (TRIMs) on Trade and Development: Theory, Evidence and Policy Implications, a study prepared for the United Nations Centre on Transnational Corporations, 1991. This paper draws on the author's analysis in that study. View all notes These performance requirements obligate the companies to increase the domestic content of their operations, expand exports, or balance their imports and exports according to a prescribed formula. In conventional economic analysis, performance requirements of this kind (referred to as trade-related investment measures, or TRIMS, in trade negotiations) are a particularly poor policy choice: instead of helping development, they damage the prospects for growth, hurt exports, and distort trade patterns. Host country insistence that multinational corporations (MNCs) obey TRIM regulations, according to the conventional view, thwarts the expansion of international comparative advantage, along whose path genuine prospects for Third World growth lie. As the developing world liberalizes its approach to foreign direct investment, do performance requirements have a legitimate place among the policy tools for Third World governments? Or are TRIMs merely a lingering form of public sector interventionism toward multinationals that should be swept away along with other ill-advised and counterproductive policies toward the domestic economy? Drawing on cases from the automotive, petrochemical, and computer fabrication sectors, I shall argue that a strong (albeit carefully circumscribed) case can be made on behalf of the use of performance requirements (TRIMs) as a tool of development and trade policy in the Third World. In the process, I show that strategic trade theory, at first lionized but lately denigrated among international political economists, can make a highly useful contribution to the formulation of policy toward foreign investors, indeed more useful perhaps with regard to the mature technology industries of the Third World than to the high-tech industries of the advanced industrial states. Finally, I shall suggest that the political economy of trade-and-investment relations is undergoing fundamental change in a direction detrimental to the South, involving new zero sum trade-offs within the better known positive sum environment of mutual economic growth. Using the analysis developed here, I attempt to draw implications for the recharacterization of the infant industry idea along strategic trade lines, for the application of the “bargaining school” approach to Third World manufacturing projects, and for the creation of a new framework for North-South trade-and-investment relations that can ensure fair access of both to the benefits of oligopolistic industries in the process of globalization.

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