Copyright © 2006 by John H. Barton, Bart S. Fisher and Michael P. Malloy. All Rights Reserved. Reproduction and distribution limited to students enrolled in Professor Fisher’s course. ____________________________________________________________________ CHAPTER XIX REGULATING THE MULTINATIONAL ____________________________________________________________________ In the portfolio investment area just examined, nations have relatively similar goals—no nation wants to encourage fraud. But, as the transnational investment takes the different form of direct corporate investment, room for disputes becomes much greater. The home and host nations will have significantly different interests and may also have significantly different philosophies. This chapter briefly explores some of the potential conflicts. It begins by looking at basic conceptual issues–including the economic basis for multinational investment; explores a selection of host- and home- state responses–including a selection of actual conflicts; considers the heightened jurisdictional risk that multinationals encounter; and then reviews international efforts to avoid or resolve these conflicts. A. INTRODUCTION 1. Conceptual Issues When examined closely, the multinational firm is a rather peculiar entity. Basic corporate law doctrine gives separate legal status to the entity as a juridical “person,” and serial incorporation in the “home” state of its headquarters and various “host” states of its subsidiaries and affiliates further complicates the “personality” of the multina- tional.1 Add to this situation the effect of the typical limited liability accorded to each corporate unit within the overall enterprise, and we end up with a collective “person” that seems to escape comprehensive supervision of its activities. In addition, since multinationals are often relatively large economic enterprises, critics typically evince a visceral attitude towards them.2 Of course, from the perspective of the multinational itself, its individual corporate units are vulnerable to the uncoordinated and potentially conflicting demands of the various jurisdictions within which it operates. We end up, then, with two fundamental problems of the multinational: (i) the problem of the possible 1. A classic, if perhaps simplistic, expression of this view is offered by Deltev F. Vagts, The Multinational Enterprise: A New Challenge for Transnational Law, 83 HARV. L. REV. 739, 740-43 (1969), comparing the “legal theory of independent corporate units,” with the “economic interdependence” of those units. 2. For example, Aguirre states: “Only the economies of the United States, Germany, Italy, the United Kingdom, Japan, France and the Netherlands are larger than General Motors.” Daniel Aguirre, Multinational Corporations and the Realisation of Economic, Social And Cultural Rights, 35 CAL. W. INT'L L.J. 53, 55 (2004), citing Global Policy Forum, Comparison of Revenues Among States and TNCs, at http:// www.globalpolicy.org/socecon/tncs/tncstat2.htm (May 10, 2000). Yet equating “revenue” of a multinational with the size of the “economy” of a state is unlikely to be a very accurate basis for comparison of the economic power of each. Put simply, a multinational cannot unilaterally increase its revenue, while a state can. Furthermore, in terms of economic “size,” revenue analysis does not reflect the economic value of the state’s capital assets, territorial control or human capital, nor does it account for the economic value of the state’s monopoly over legislating and rule-making. Cf., e.g., Mary Jacoby, EU Gives Microsoft Deadline to Comply, WALL ST. J. EUROPE, Mar. 21, 2005, at A1, col. 5 (reporting that EU regulators are considering possible fines of $5 million per day for Microsoft failure to comply with antitrust orders). 2 CHAPTER XIX REGULATING THE MULTINATIONAL inadequacy of any one national jurisdiction to regulate the activities of the multinational; and, (ii) the jurisdictional risks encountered by the multinational in operating under more than one legal system. Terminology. As with the body of non-public international law variously referred to as “private international law,” “transnational business law,” and other terms,3 there are various ways in which firms involved in international business have been character- ized–“multinational” or “transnational” corporations or “enterprises,” or some combination thereof being the most prevalent. These terms are often referred to by such acronyms as MNCs, MNEs, TNCs or TNEs.4 For the sake of convenience, we refer to these firms simply as “multinationals” or “MNs.” 2. The Economics of Multinational Investment In international investment two polar strategies can be discerned. In one, the savers of one economy invest on a net basis in assets of another economy, typically through international loans, bonds, and portfolio investment. In the other, a firm opens a branch or subsidiary in another nation. The former of these is generally explainable by macroeconomic considerations. In the case of the latter, however, there is often cross- investment (e.g., the U.S. auto industry investing in Europe while the parallel European industry is investing in the United States) so that explanations have to look to the theory of the firm. The net investment situation, already explored in Chapter XVII, is exemplified by OPEC investments in the Eurodollar market and the banks* parallel investment in developing nations. To the extent that the banks are following economic considerations here, they are helping move capital from the Middle East, where its economic rate of return (as reflected in the interest rate) was low, to other economies, where its economic rate of return would he higher. Because of differences in economic opportunities to use capital, the marginal return on capital varies from place to place, and capital will flow to the place where its return is highest. By tariffs or currency adjustments, a nation may be able to influence that rate of return to modify the flow of capital. Although these factors alone do not explain cross-investment, note that portfolio diversification can explain some such cross-investment. It is reasonable for European investors, facing currency-exchange risks, to want to place some of their assets in dollars, which pose a different foreign exchange risk, while U.S. investors, for the same reason, place some of their assets in foreign currencies. The direct investment situation is more complex. In general, one would expect a local firm to do better than a foreign-controlled firm. Putting the question a little more sharply: why can*t a French firm, in France, using capital borrowed from the United States, always out-compete a U.S. firm that has to pay the same amount for its capital but is probably never able to understand French operations as well as the local firm? And, going still further, in a reflection of Chapter I*s product-cycle analysis, why can*t a U.S. firm obtain the greatest economic return in applying its new technology to the 3. Cf. Chapter I, supra at , n., (discussing terminology). 4. See PETER MUCHLINSKI, MULTINATIONAL ENTERPRISES AND THE LAW 12-15 (1995) (discussing history and content of terminology); Menno T. Kamminga & Saman Zia-Zarifi, Liability of Multinational Corporations Under International Law: An Introduction, in MENNO T. KAMMINGA & SAMAN ZIA-ZARIFI (eds.), LIABILITY OF MULTINATIONAL CORPORATIONS UNDER INTERNATIONAL LAW 1, 1-4 (2000) (comparing varying usages of terminology). B. NATIONAL JURISDICTION AND MULTINATIONAL ACTIVITIES 3 French market by licensing that technology to a French firm that understands the market? The answer to these questions lies in a quasi-monopoly or in an economy of inte- gration that is not fully reflected in the usual licensing arrangements. If the local economy does not yet have the trained entrepreneurs and staff needed for the project, then foreign direct investment is likely to be essential. If the technology is evolving so rapidly that management arrangements are a more practical way to transfer it than are a series of separately negotiated contracts, then the administratively integrated operation has a comparative advantage that explains its emergence and survival. If economies of scale transcend the market available in any single nation, efficiency may lead to the IBM or automotive industry pattern, where different production steps (e.g., those for computer chips or transmissions or assembly) are carried out in different nations, each on a scale intended to meet a multinational or global market. And there are other economies of integration that are less defensible economically. The rnultinational (MN), with its well- understood credit rating, may be more easily able to raise new capital than its local competitor. Or the extractive MN may be able to take advantage of tax breaks in ways unavailable to a less vertically integrated operation. What is clear is that the evolution of the multinational corporation is, in practically every case, closely coupled with some form of market power. The areas in which MNs and international investment have become most important are the extractive industries (where market power and tax advantages are especially relevant), the manufacturing industries (where economies of scale have gone beyond the nation), and the high- technology, oligopolistic industries such as pharmaceuticals, chemicals, and electronics. Although MNs do play a role in relatively special situations such as international commodity trading in, say, sugar or bananas, there