the rise of global corporations

This paper was written for quite possibly the best combination of professor and class I’ve ever experienced. If only all academic endeavor challenged so profoundly, surveyed so broadly, and bore as much intellectual fruit…

Hegemonic Stability and the Rise of Global Corporations
by Devin DeCiantis

“The logic of markets is borderless,
but the logic of politics remains bounded.”
– Louis W. Pauley, Who Elected the Bankers? Surveillance and Control in the World Economy, 1997

globe Traditional theories about power structures have focused on the role of states as principal agents in international affairs. In aggregate, these theories justify most of the major geopolitical incidents that have shaped the modern world order, but none of them effectively do so on their own. That’s not to suggest that existing theories based on political cooperation don’t have their place among the predictive frameworks of the 20th century. Many of them have helped to explain some of the century’s most important economic and security inflections. This paper simply suggests that where prevailing theories break down, a careful examination of the often quiet and understated rise of the modern corporation may offer a compelling supplementary explanation.

One need only look at trends in portfolio and foreign direct investment flows to witness modern corporations driving international stability forward, increasing in power and institutional authority as their patron states struggle with fiscal, political and military balance. At the same time, existing global institutions for stabilizing trade and finance have squandered much of their early credibility. As relics of past hegemonic efforts, they have struggled to foster international stability under the burden of disparate political control and meager tools of enforcement.

Corporations, on the other hand, have spent the better part of the last century finding ways to side-step trade restrictions, discordant legal systems, and countervailing duties in the pursuit of their own economic self-interest. As this paper will argue, a by-product of that unabashed self-interest has been the foundation of a global system of open commerce and trade that has produced a more permanent structural stability than any of the hegemonic powers have been able to provide to date.

Failures of Hegemonic Stability Theory

Briefly stated, Hegemonic Stability Theory (HST) as championed in its various forms by Kindleberger, Krasner and Keohane posits that an international system of trade and finance will only function smoothly in the presence of a hegemon or group of cooperative leading powers – whose motives involve establishing an open system out of blatant (“coercive”) or enlightened (“benevolent”) self-interest. The key insight of this model deals with the “public goods” issue, such that the hegemon is inclined to lay down a framework for global stability (i.e. the public good) which protects and expands both its own interests and extends the benefits of collaboration to the rest of the international community. Public goods, however, present unique challenges to the hegemon as well as the relative actions of major powers, and lead to failures in HST to explain structural strength in the absence of a reigning hegemon.

To Kindleberger’s credit, his version of the HST model fits historical evidence for the first two decades after the second World War as well as most of the 19th century, but that shouldn’t be surprising coming from a man who was intimately involved in the development and launch of the Marshall Plan, perhaps post-WWII’s most influential public good. It does, however, make several flawed conclusions about the first half of the 20th century as well as the years beyond 1970. For instance, between 1900 and 1918, Britain experienced a decline relative to Germany, the US and Russia yet this period witnessed a drop in US tariffs and a consequent rise in openness, behavior that HST on its own wouldn’t predict.

Conversely, during the interwar years when the US was a clear hegemon in the classical sense, there was a distinct absence of openness, raising American protectionism to all-time highs and reducing total global trade by nearly two-thirds. When hegemonic leadership and investment in public goods could have stabilized the system and provided considerable benefit to the system’s strongest power, the US retrenched. It didn’t bail out the British, the Austrians and the Germans in 1931, it devalued the dollar and went off the gold standard in 1933, and precipitated a fall in US prices which made domestic goods cheaper and struggling European goods more expensive.

As power shifted from Britain to America, a dangerous situation emerged: Britain had the political will to support an open global system of trade – as it had for most of the 19th century – but it didn’t have the economic means. America, on the other hand, had the means but no will, flying in the face of their own self-interest as predicted by HST. Consequently, stability never unfolded, and the world eventually devolved into open global war.

But how could HST be so accurate under certain scenarios and produce such counter-intuitive predictions in others? Keohane’s modification offers an explanation – at least during these interwar years. By his definition, hegemonic states must have the ability to stabilize, the will to do so, and hold a dominant economic, political, and military position relative to their peers. As such, post-WWI America wouldn’t be considered a true hegemon, because it didn’t have the will to become one.

That said, removing America’s motive from the mix doesn’t entirely explain the lack of structural openness, perhaps because it focuses on the will of the state as opposed to the ability of corporations, who at the time of the Great Depression were crippled by massive unemployment, a liquidity crunch, waves of corporate bankruptcies, underutilized capital, and eroding markets for their finished goods. It could thus be argued that the lack of openness was the result of American corporations focusing more on their domestic interests than their external opportunities, given the negligible scale of foreign direct investment abroad.

More than a state-wide retrenchment from public goods as Keohane and HST proscribe, American corporations withdrew from foreign markets out of necessity, reducing investment in their established “semi-private” or “club” goods (i.e. trans-Atlantic phone lines, shipping infrastructure, etc.) and choking off the global system of trade from the inside out.

Thus, a careful reading of the rise of corporate influence in America may provide another explanation for the contradictory outcomes suggested by HST between 1900-1939. If the argument holds, “Modified HST” (or MHST) might also provide insight into other significant eras where HST can’t explain the observable disconnect between hegemony and openness.

Rise of the Global Corporation

As the reigning 19th century hegemon, Britain’s ascendancy and structural control fit modified HST perfectly. The country’s early mercantile chartered companies were synonymous with state interests, and acted as the instruments of foreign economic policy, if not their direct beneficiaries. Consequently, as British power declined after the Panic of 1873 and the ensuing global “Depression”, protectionism gripped the international economy. This lack of openness was a predictable outcome, both according to HST and given the subsequent decline in monopolistic trade by these early companies.

At the dawn of the 20th century, having followed a similar though less mercantile path than their British cousins, American corporations were just beginning to mature in their nature and aims. After the Long Depression and the ensuing bankruptcy epidemic, “a great merger wave” took place between 1897 and 1903. Increased M&A swelled the value of open trade, giving these newly-merged companies political and economic heft. This, in turn, produced a rise in corporate involvement within America’s expanded portfolio of international treaties (e.g. 1911 treaty with Japan and 1920s treaties with Germany) within which corporations were first conferred legal status in foreign jurisdictions as a corollary of any political agreement.

Thus, while HST fails to reconcile a decline in the reigning hegemon with a rise in structural openness, MHST suggests that corporations themselves began to compliment state interests abroad, becoming pseudo-hegemonic stabilizers through their participation in foreign legal systems and given their incentive to begin establishing physical ties between the US and its trading partners.

In order to invest this capital and energy in foreign markets, corporations require economic, political and legal stability such that planning and investment can take place with confidence. The foundations of that global stability and operational predictability are found in the treaties and trade negotiations of the early 20th century, setting the groundwork for openness and international cooperation in the presence or absence of a hegemonic regulator.

We’ll deal first with the presence of a hegemon, and establish how corporations have complimented state interests in stabilizing the international system by examining the first two decades after WWII. At the time, the Bretton Woods system was designed principally by the reigning hegemon to secure American interests abroad, but while the complimentary Marshall Plan may have been political in its origins, it was almost exclusively corporate in its management, implementation, and economic benefit. Keohane himself points out that American hegemony in the years after the war was used to establish international economic arrangements consistent with the structure of American capitalism. Here again, the US was rolling corporate policy into foreign policy, intent on establishing a political and economic environment in which capitalism could flourish.

Where MHST is most valuable, however, is where it explains an increase in structural openness in the absence of hegemon. To better understand this scenario, it’s important to clarify the difference between a state-sponsored “public good” and a corporate-sponsored “semi-private” good, because the latter represents a more permanent form of structural stability, enduring regardless of hegemonic influence.

The Importance of Semi-Private Goods

MHST implies that state openness is based on trade, while corporate openness is based on investment, with the corollary that trade can wax and wane depending on political climate but investments (particularly in illiquid assets or structural technologies) are less likely to decline in the absence of their original investors. Therefore, longevity and resiliency of this emerging corporate infrastructure are of considerable importance to MHST. Unlike the United Nations or the World Trade Organization, semi-private goods (e.g. telecommunications infrastructure, shipping infrastructure, airports, capital markets, and private intranets) represent the foundations of a common system of trade, communication, and information sharing, and avoid HST’s issues with hegemonic stabilizers because the infrastructure is inherently not public. More specifically, it’s exclusive to members of the “club” that can both afford to pay and agree to participate in negotiated commercial transactions.

Such a framework is inherently more stable than networks dependent on opaque or translucent political actors, particularly once private club members (as customers, clients, or service providers) establish a solid track record of reliability.

Beyond Bretton Woods

For the period beginning with the collapse of Bretton Woods in the early 1970s and continuing through to the fall of the Soviet Union in the late 1980s, the global system of trade and cooperation expanded apace. But the unrivaled US economy of the 1950s eventually begins to decline relative to Germany, Japan, and the USSR, in spite of successive rounds of global tariff reduction. Domestic recession and stagflation in the late 1960s and most of the 1970s began to cripple corporate interests, as industrial capacity among America’s trade partners began to climb and overinvestment in domestic production capacity left American companies vulnerable to swings in global supply and demand.

As a natural consequence, the US was no longer able to pursue international stability and openness because their post-war competitive advantage vis-a-vis Germany and Japan had eroded. It is precisely at this inflection point where MHST offers a compelling explanation for the lack of closure in the markets, despite a decline of the hegemon. The premise is essentially two-fold: 1) infrastructure established by American corporations was still lubricating the international systems of trade, despite the country’s domestic troubles, and 2) where American corporations declined in financial and productive capacity, their German, Japanese, and increasingly developing world competitors were quick to fill the void.

Corporations had finally come of age. Armed with established structural assets, existing and emerging technologies, and evolving information requirements, the 1970s and 80s witnessed corporations becoming a collective “hegemonic force” for global stability, in the face of a retreating United States. Free markets and the efficiency of private enterprise were embraced as a means of jumpstarting sluggish economies around the world, and they did so with full support of their jurisdictional governments. This arrangement produced some of the dominant political features of the era: Thatcherism, Reaganomics, privatizations, free enterprise, Indian economic liberalization, Chinese economic liberalization, and even the collapse of the Soviet Union.

It would be grand hyperbole to suggest that all this was the result of “corporate hegemony”, but the rising international influence of the chartered company from its humble position almost a century before was certainly an intervening factor in the growing stability of the world system, and a control against the anarchic tendencies often postulated by the Realists and even the Institutionalists in the absence of a hegemonic stabilizer.


APPENDIX A: Beyond the Cold War: Lessons for the 21st Century Corporation

Should America continue to decline in influence in the absence of a hegemonic replacement, HST would once again predict diminished openness and cooperation. MHST, on the other hand, would suggest that corporations will continue in their expansionary tendencies regardless of the power of their state sponsor, gradually stabilizing foreign states and markets to fuel their continued growth. Eventually they might even begin to call new foreign states home. Witness the rise of Sovereign Wealth Funds – estimated to reach $10 trillion by 2012 – and the cross-border effects of FDI and global M&A on underutilized capital and labor.

Moreover, given that corporations are inherently more nimble than the states, their ability to adapt to a changing hegemonic climate is likely to ensure their continued existence as powers swell and recede. Should capitalism experience a backlash from citizens and smaller states who think free markets have gone too far in the unbridled pursuit of profit (as Keohane suggests) companies can simply embrace social and environmental responsibility in addition to profits and compete and innovate around the emerging metric of the “triple bottom line”.

That shift from profit seeking toward socially responsible enterprise would involve corporations adopting elements of paternalism and traditional public goods from their sovereign administrators. For instance, Wal-Mart is already the largest private sector employee in America, and moves to provide its workers with health insurance could change the fundamental nature of Medicaid. This is obviously speculation, but it reinforces the idea that the corporations and their functional connections are likely to remain in place, despite hegemonic flux. In fact, given their entrenched role in the modern global economy, they may eventually overpower states as a reflection of their stakeholders’ wishes, and reduce government to the role of employer of last resort and arbitrator of domestic disputes.


Selected References

Bratton, William Jr. “The New Economic Theory of the Firm: Critical Perspectives from History” Stanford Law Review, Vol. 41, No. 6., 1989, pp. 1471-1527

Cheffins, Brian R. “Mergers and Corporate Ownership Structure: The United States and Germany at the Turn of the 20th Century” The American Journal of Comparative Law, Vol. 51, No. 3., 2003, pp. 473-503

Cypher, James M. “The Deadly Connection: Reagan and the Middle East” MERIP Reports, No. 128, 1984, p7-18

Johnson, The Rise of Sovereign Wealth Funds F&D Magazine (IMF), September 2007, Volume 44, No. 3

Keohane, Robert O. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton University Press, 1984

Kindleberger, Charles P., “Dominance and Leadership in the International Economy”, International Studies Quarterly, 1981, pp242-254

Krasner, Stephen D. “State Power and the Structure of International Trade” World Politics, Volume 28, No. 3, 1976 pp317-347

Mazumdar, D. L. “The Modern Corporation and the Rule of Law” University of Pennsylvania Law Review, Vol. 114, No. 2., 1965, pp. 187-208

Pauley, Louis W. Who Elected the Bankers? Surveillance and Control in the World Economy, Cornell University Press, 1997

Walker, Herman Jr. “Provisions on Companies in United States Commercial Treaties” The American Journal of International Law, Vol. 50, No. 2., 1956, p378

“World Investment Report”, unctad.org, 2007

Yarbrough, B. & Robert, “Cooperation in the Liberalization of International Trade: After Hegemony, What?” International Organization Vol. 41, No. 1., 1987, pp. 1-26
Footnotes:

Global cross-border M&A activity was roughly $880 billion in 2006 – second only to a record-setting $1.1 trillion in 2000 – an increase of nearly 1200% since 1987. – “World Investment Report”, unctad.org, 2007

Similarly, outward FDI was $1.2 trillion in 2006, having grown by more than 860% over the same time frame. ibid

The US ran an estimated deficit of $423 billion in 2006 and the national debt now sits at over $8 trillion (or roughly 2/3 of GDP), “BUDGET FOR FISCAL YEAR 2007,whitehouse.org

Principally, the World Bank, IMF, and WTO

Corporations can avoid the tariffs associated with selling into a protected market by investing directly in the market and selling from within

According to Kindleberger , these goods ought to provide include: 1) maintaining a relatively open market for distressed goods; 2) providing stable or countercyclical long-term lending; 3) policing a relatively stable system of exchange rates; 4) ensuring the coordination of macroeconomic policies; and 5) acting as a lender of last resort

Though in absolute terms Britain was still a bona fide hegemon

Through legislation such as the Underwood Tariff Bill of 1913, decreasing average tariffs from 41% to 27%

As evidenced by the Smoot-Hawley and Fordney-McCumber Tariffs

Between 1929 and 1934

1911 treaty with Japan – Article VII: “Limited-liability and other companies and associations, commercial, industrial, and fhancial, already or hereafter to be organized in accordance with the laws of either High Contracting Party and domiciled in the territories of such Party, are authorized, in the territories of the other, to exercise their rights and appear in the courts either as plaintiffs or defendants, subject to the laws of such other Party.” – Walker, The American Journal of International Law, p378

“Former Secretary of State Dean Acheson aptly termed this period “the creation.” At this “creation,” US corporate leaders possessed an unprecedented degree of access to foreign markets and strong control over international trade, banking and investment… This was the magic combination that gave rise to the longest and most impressive boom in the history of capitalism.” – Cypher, James M. “The Deadly Connection: Reagan and the Middle East”, p7

Here the distinction between “semi-private goods” and “club goods” deals with the nature of the provider (i.e. private interests for “semi-private” goods and government or state interests for “club” goods, though functionally the two are essentially the same)

An important recommendation of the Trilateral Commission was that “Nation states would have less control over the international economy, while a new world order would emerge which would be more favorable to the economic interests of transnational corporations of US, German and Japanese registry.” Cypher, p13

Johnson, The Rise of Sovereign Wealth Funds, F&D Magazine (IMF), September 2007, Volume 44, No. 3