The Multinational Agreement on Investments (MAI) was a regulatory regime by the OECD designed to protect transnational corporations (TNC). Positive spillover effects of foreign direct investment (FDI) are uncertain and host countries have imposed restrictions on TNC to assure benefits. The impact of the MAI on entrepreneurship has not been studied. The impact on opportunity structure, supply of equity capital, entrepreneurial activity, and international entrepreneurship is considered. Entrepreneurship is an alternative to TNC in economic development. Does entrepreneurship require wide dispersion of political power, democratic processes, viable nation-states, and empowered local communities or can it co-exist with global monopolies and a global regulatory regime that assumes that one size, designed for TNC, fits all?
The Multilateral Agreement on Investment (MAI) within the Organization for Cooperation and Economic Development (OECD) sparked one of the first global debates and political movements in history. It was defeated by a coalition of non-governmental organizations (NGOs) mostly from OECD member states. It galvanized the anti-globalization movement and sparked the riots at the WTO meetings in Seattle in 1999. It has been the catalyst to at least eight books largely critical of the initiative.1 Neither the proponents of the Multilateral Agreement on Investment (MAI) or critics of MAI have taken into account its impact entrepreneurs, the new venture development process or its impact on small & medium enterprise (SMEs). The purpose of this essay is to explore the connection between a proposed MAI and entrepreneurship.
The MAI has been conceptualized in a variety of ways by its corporate beneficiaries, their industrial associations, and governmental supporters on one hand and by its critics, on the other hand. In the broadest sense, MAI is intended to create a single universal standard that defines the environment of foreign direct investment (FDI). The importance of the external environment has been a sub-theme of entrepreneurship research for some time most typically in attempts to define the factors that motivate entrepreneurial ventures (Aldrich, 2000). Social and economic factors such job loss, a blocked promotion, recessions, or unemployment can lead to entrepreneurial action (Brockhaus and Horwitz, 1986; Davies and Gibb, 1991; and Watson et al, 1994). The conceptual frameworks of Miller and Friesen (1982) and Covin and Slevin (1989) are useful in describing supportive entrepreneurial environments.
The environment that most concerns large transnational corporations (TNC) is not quite the same environment that has preoccupied entrepreneurship scholars. Actions and public policy initiatives that are designed to create greater environmental munificence for TNC, like the MAI, may have a detrimental impact on new ventures and small & medium enterprise.
What vision of economic development is embedded in the MAI? What is its impact on various aspects of entrepreneurship such as opportunity and access to equity capital? What is the impact of the MAI on ethnic, expatriate, and international entrepreneurship? Since the MAI represents a major challenge to national sovereignty and perhaps even democratic processes, it raises important questions about the environment of entrepreneurship that go far beyond the immediate triggers of an entrepreneurial event (Shapero, 1983).
Given the economic clout of transnational corporations (TNC) and their global mobility, they are perceived by some as capable of evading public control and causing harm to employees, consumers, local communities, and the environment (Koenig-Archibugi (2004, p. 235). There have been widespread efforts to regulate TNC at the national level (Ha-Joon Chang. 2004)).2 Globalization has been seen as altering the balance of power between citizens and corporations in favor of the latter and reversing some of the achievements of the struggle for democratization within developed countries and for national self-determination in developing countries (Koenig-Archibugi, 2004). “Globalization means that it is more difficult for national governments to hold corporations accountable than in the past” (Keohane, 2003, p. 146).
If TNC have been larger and more powerful than many nation-states, why was a multilateral agreement on investment needed? It is in the strategic interests of TNC to ensure uniform global rules that reduce both their transaction costs and the uncertainty surrounding their investment decision while simultaneously giving them secure property rights (Malhotra, 2004, p. 726). Since the vast majority of TNC are based on OECD countries, it is not surprising that reaching a multilateral agreement on investment has been and remains a high priority for OECD governments. The standard case for an MAI is that foreign direct investment (FDI) is now considerably more important than trade in international economic integration and the regulatory architecture for this shift is unable to cope with this development (Walter, 2001). By 1993 annual sales by foreign affiliates of parent MNCs were estimated at $6 trillion, greater than the total world trade in goods and services of $4.7 trillion of which two-thirds was accounted for by TNC (UN World Investment Report, 1996).
The problem with the existing regime is that countries have the right to impose trade-related investment measures (TRIMs) as part of their industrial and national economic development policy. These measures lay at the heart of the negotiation about multilateral agreement on investments. Rich countries and liberal economists argue that spillover effects assure that FDI will be positive for host countries (WTO, 1996). The OECD distinguished five positive spillovers of FDI: (1) transfer of technology and know-how, (2) enterprise development restructuring, (3) contribution to international trade integration, (4) bolstering business sector competition, and (5) supporting human capital formation (OECD, 2003). FDI can trigger productive spillovers by transfer of technology and know-how through imitation and forward and backward linkages with local firms (Saggi, 2002). However, lost opportunities for technology transfer through FDI are also well documented (Malhotra, 2004, p. 729). In fact, successful, sustainable technology transfer through FDI has been more the exception than the rule. Moreover, FDI may be an expensive way for achieving technology transfer since it requires higher rates of return to compensate for perceived risks (Malhotra, 2004). In the absence of an appropriate and effective domestic competition policy, foreign firms can crowd out domestic investment, stifle domestic competition, reduce productivity and growth, raise domestic prices, and diminish prospects for economic development (Malhotra, 2004, p. 731).
Thus, developing countries have put forward a number of reasons in the WTO for maintaining TRIMs. Among these are ensuring the fullest, most efficient contribution of investment to their economic development. TRIMs may allow small firms to expand to their full competitive potential and bring infant industries to maturity (Malhotra, 2004, p.724). In doing so, such enterprises are likely to increase domestic employment and valued added. TRIMs can also mitigate the problems of disadvantaged regions and enhance the contribution of investment to building and upgrading domestic technological capacity and increasing the local share of exports. Developing countries have also argued that TRIMs counter the trade-restrictive and distorting strategies of TNC. For example, local content requirements can be used to increase employment, protect the viability of local firms, and avoid overpricing by TNC. Local content requirements can also be a necessary and effective response to vertically integrated TNC that dominate markets. In sum, the positive spillover effects of FDI are not inevitable or automatic. TRIMs are designed to increase the probability of positive spillover effects by allowing nation-states maintain control over their own policies. Rich countries and the MAI want to eliminate this policy discretion. Rich country opposition to TRIMs may, in a sense, be an anti-entrepreneurial orientation.3
Although a number of countries have de-emphasized the use of local content in recent years, such requirements continue to be used in both developing and developed countries – particularly in the automotive sector where they are most widespread in developing countries.4 Regional organizations such as the European Union and NAFTA have taken steps to coordinate investment rules, as have many bilateral investment treaties, mostly between developed and developing countries since the early 1980s (Walter, 2001). The common complaint of business has been that this patchwork quilt of bilateral, regional, and multilateral rules relating to investment are highly uneven, contradictory, and generally “weak” in terms of guaranteeing market access to important developing countries, particularly in East Asia and Latin America (Walter, 2001).
As formulated within the OECD, the MAI agreement was not based on an internationally negotiated set of specific or troublesome sectors of the economy nor was it intended to be regional. On the contrary, MAI was designed to cover all potential situations affecting foreign investment, eventually throughout the world. Wood (2000) argues that this was probably a result of the experience of the GATT negotiations, which went through many years of tortuous negotiations about regulations and tariff barriers. TNCs wanted a predictable and stable global environment for making long-term investment decisions. A piecemeal approach was considered as less than optimal.
The heart of the MAI was in section III of the negotiating text, which refers to two fundamental aspects. The first is “national treatment” which means that foreign investors receive treatment “no less favorable than the treatment it accords to its own investments and their investment with respect to the establishment, acquisition, expansion, operation, management, use, enjoyment, and sale or other disposition of investments” (OECD, 1998, p. 13). Acceptance of the national treatment principle would limit the ability of host countries to restrict or exclude investment in certain sectors or require that local ownership clauses and other current permitted performance requirements be specified in country schedules. This would limit the ability of countries to control and direct domestic investment for development purposes, including even reducing the flexibility provided by certain bilateral investment treaties. The second is “most favored nation treatment” which demands that foreign investors of one country are treated equal to the foreign investors of any other country (OECD, 1998). In sum, a nation-state would have to treat all investors and investments equally.
The implications are immense. There would be no political boundaries to the global flow of capital, no way of controlling or judging between different types of investments and their effects, and no interest higher than the rights of TNCs by which to evaluate decisions about investment. In effect, the OECD version of MAI would have removed the ability to regulate investment from national governments that signed the agreement (Wood, 2000). Furthermore, the OECD text set out a list of regulations that explicitly would not be permitted relating to transparency, transfer of funds, entry and residence of key personnel, property rights, and performance requirements. With regard to performance requirements, the MAI directly attacked TRIMs by prohibiting any requirement to:
This represented a huge shift in the legal and economic context of foreign direct investment.
MAI was a set of rules and “meta-regulation” (Wood, 2000) that would supersede all national regulation designed to assure that host countries might share in some of the benefits of foreign direct investment. Critics claimed that the Multilateral Agreement on Investments would have skewed the political process already favoring TNC even more so and permanently institutionalized the dominance of corporations over national governments.
While MAI was nominally defeated at the OECD and shelved at the WTO Millennium Round agenda in Seattle in 1999, major business lobbies continue to push one form or another of the kind of liberalization and investment regime embedded in the original MAI. (Walter, 2001)5 For this reason, its potential economic impact of some version of MAI remains pertinent to entrepreneurs and entrepreneurship.
The underlying assumption of MAI is that FDI is unconditionally good for nation-states and local communities. The strategies of industrial recruitment and plant relocation, long dominant in thinking about community development, could well be enshrined by MAI. Cities and states would go into the marketplace and "buy" jobs and business activity from large corporations, the "sellers" of jobs (Ventriss, 1987, p. 4). In this view of economic development:
Cities and states compete intensively for corporate investment. Tax breaks, subsidized land, cheap capital, tailored infrastructure - all have been increasingly offered to corporations in massive amounts…Tax expenditure benefits have largely been captured by the largest multi-location firms. These firms are the most cost effective combatants in the regional war for private investment. The evidence suggests that they manipulate public competition in order to acquire public benefits for private investments that would have happened anyway. Industrial aid bonds go to corporations that would have invested in the same places without them. (Friedland, 1983, p. 44)
Economic development both in the United States and worldwide has focused on competing for new plants often in the form of DFI. The motivation of the firms is lower costs or less interference with managerial autonomy.
A major problem with the plant relocation strategy of development is that it creates no new opportunities for employment or higher productivity on the international level. It simply redistributes economic assets geographically in order to achieve strategic and tactical objectives of TNC. Why do governments do it? An interesting perspective on the appeal of industrial recruitment came from a state official. He observed that compared to other strategies, industrial recruitment had lots of hype and political appeal. When the new plant opened, there was lots of press coverage and ribbon cutting ceremonies. The glamour of industrial recruitment led officials to think that it was good public policy (Author interview, November 1989). As in the poorest countries in the world, big infrastructure projects create an appearance of economic development without necessarily the substance of development. Industrial relocation as a development strategy is actually a neo-mercantilist beggar-thy-neighbor policy. Instead of the competitive currency devaluations of the Great Depression era, it is a race to offer subsidies and, some would argue, a race to the bottom.
Economic development policies and programs that measure their objectives solely in terms of jobs and income do little to move communities and states towards economic vitality. When a city, state, or national development agency launches a campaign to attract foreign investment to generate jobs, concessions including tax breaks, free or cheap land, long-term and low-interest loans, buildings, utility development, highway construction, and railroad spurs are offered. If the effort to obtain a plant succeeds, the incoming company will probably bring its own managers and highly skilled workers, while the community provides the low-cost unskilled workers. This can lower the net quality of a community's human resources (Shapero, 1983, p. 121). One study conducted in the late 1950's - long before industry relocation efforts became as widespread as they are today - found some 16,000 economic development organizations competing for 200 available corporate moves at a cost of well over $250 million (Shapero, 1983, p. 121). Another study found that there were 7,500 economic development agencies pursuing the same industries and offering similar incentives packages to lure them to particular localities (Ellenis, 1983, p. 116).
Industries may also pose considerable cost to the community in terms of maintenance of infrastructure, provision of services such as water treatment, police and fire protection, and damage to the environment. The costs of a "win" in the industrial recruitment game may exceed the benefits (Waugh and Waugh, 1988, p. 219). When a community attracts a major branch plant, it becomes a hostage to firms with headquarters located elsewhere. This is perhaps more dramatic on the international scene. An example of the long-term negative effects of importing industrial plants to a region can be found in the Mexican-American border program. In 10 years, the program attracted some 450 U.S. manufacturers with the bait of low-cost labor. Once wages improved, the companies began departing for more distant foreign locations, like China, with even lower wages.
Are direct incentives to foreign firms, a cost effective way of creating jobs? While often rationalized as job creation measures, this approach to development is far from optimal. For example, in 1982, Tennessee offered an incentive package for a Nissan automobile manufacturing plant that cost $11,000 per job created (O’Neil, 2005). Five years later, Tennessee offered Saturn a package that more than doubled Nissan’s package in terms of dollars per job created at $26,000 per job. In the 1993 Mercedes sports utility vehicle plant bidding war, Alabama out-dueled 34 other states with an incentive package that totaled $300 million. Infrastructure development, job training, tax concessions, and other perks were included in the incentive package (O’Neil, 2005, p. 12). The total value of the direct incentives to Toyota Motor Corp to locate in Scott County, Kentucky was $125 million to create 3,000 jobs or approximately $42,000 per job. Is FDI an effective way of promoting economic development. A study by Agosin and Machado (2005) concluded:
The main conclusion that emerges from this analysis is that positive impacts of FDI on domestic investment are not assured. In some cases, total investment may increase much less than FDI or even fail to rise when a country experienced an increase in FDI. Therefore, the assumption that underpins policy towards FDI in most developing countries – that a liberal policy towards MNEs is sufficient to ensure positive effects – fails to be upheld by the data.
Countries that have vigorously screened FDI for the benefit of their own economic development – South Korea, China, Malaysia, and Vietnam – have been some of the best performing and fastest growing economies over the last decade.
The literature on community based economic development began to speak of "wealth creation" instead of "job creation" in the late 1980’s. A job may be low paying, dead-end, or even likely to be terminated if the employer cuts back, folds or relocates. The cost of creating jobs may be greater than the financial and economic gain they generate. Wealth creation, in contrast, focuses on the entrepreneurial process by which resources are put to more valuable use (Vaughan, Pollard and Dyer, 1986).
In contrast to the zero-sum game of industrial relocation, local entrepreneurship creates new capacity that is deeply rooted within a community and far less expensive. Molnar and associates (1997) estimated that an incubator program averages $1,100 per job created. They also found that 84 percent of incubator graduates remain in the area in which they were incubated. According to the National Business Incubator Association (NBIA) Survey of Business Incubators (Linder, 2003), there are approximately 950 business incubators operating in the U.S. in 2005 up from 550 in 1997. In North America, incubators assisted more than 35,000 start-up companies in 2001 and these firms provided full-time employment for nearly 82,000 workers and generated annual earnings of more than $7 billion (Linder, 2003). Incubators are just one approach to stimulating entrepreneurship; others include entrepreneurship education, Small Business Development Centers (SBDCs), and science parks.
One advantage of indigenous development is that it begins with a ubiquitous resource, the nation's inventors and entrepreneurs (Udell, 1988, p. 61). Local entrepreneurs are not likely to be enticed away given their deep roots in the community and as they become successful, they serve as a role model for others with similar aspirations. Entrepreneurship tends to be a local phenomenon because the personal networks are typically local. When a state lacks comparative advantage, human resource and entrepreneurship development may be the only viable path to development. Japan, South Korea, Taiwan, and Singapore are examples of nation-states that lack the obvious factor endowments for economic development but have been exceptionally successful through the development of human resources and indigenous industry.
Universities, not foreign direct investment, have most commonly been associated with the development of economic clusters such as Silicon Valley and Stanford, Route 128 and MIT and Harvard, Research Triangle and Duke, University of North Carolina and North Carolina State, and Austin and the University of Texas (Leydesdorff and Etkowitz, 1997). Shane (2003, p. 121) shows that research and development activity, often associated with universities, makes entrepreneurial opportunities possible.
MAI promotes a kind of economic development strongly biased towards industrial relocation. It discounts indigenous development and entrepreneurship.6 It has pushed entrepreneurs off the international development policy radar screen. It diverts attention from evidence that entrepreneurship is a better engine of job creation, innovation, and national competitiveness than foreign investment. MAI was based on the assumption that more mobile capital would be good for development. The evidence suggests that openness to foreign direct investment has no impact on the rate of growth of national economies (Rodrik, 1998, Grilli and Milesi-Ferretti, 1995, and Kraay, 1998).7 Where foreign investment flourishes, it may attract the best talent to multinational firms instead of local enterprise8 let alone local entrepreneurship.
Even when FDI has had a positive impact as it did in the United States in the 19 th century and in China or Eastern Europe today, it can never be a substitute for indigenous entrepreneurship, capital, or initiative. Proponents of MAI have argued that by creating a global regulatory regime, risk will be removed from foreign investment and thereby reduce the need for local, provincial, or national government incentives. This is a tenuous argument since the United States would not be considered a high-risk investment venue but states have been compelled to compete for large foreign investment projects in the automobile industry. If nation-states accepted the MAI, it would guarantee nothing more than they meet the minimum conditions for foreign investment. Poor countries on the periphery will still be seen as higher risk even if committed to the MAI. These countries will still need to compete for FDI by offering concessions that offer a premium for TNC.
An unstable environment for foreign investment will remain so irrespective of the contractual obligation a particular government might make to MAI. TNC will accept unstable environments and various risks when the prize is mineral wealth in the form of diamonds and oil. TNC in these industries have long operated in the least stable parts of the world and will continue to do so irrespective of whether the MAI becomes a global regulatory standard or not. Indeed, the pursuit of mineral wealth is often a cause of civil strife, when such strife is considered essential to establish and maintain control over the mineral wealth of poor countries.
Opportunity has been seen as the heart of entrepreneurship. What would be the impact of the MAI on the flow and structure of opportunities at the national or local level? To the extent that the MAI allowed TNC to feel more comfortable operating on even a wider scale globally, it might have a significant dampening effect on the flow of opportunities. At the retail level, this might be called the global “Wal-Mart” effect. Wal-Mart has been accused in the United States as having a negative impact on small retail operations in small towns and cities when it opens one of its stores or superstores at a nearby Interstate highway interchange. It destroys the underlying economic fabric of the town and transforms small shop owners into “clerks” and “greeters.” Is there any reason to expect that the impact would be different as Wal-Mart and its imitators move to become more global?
Mail Boxes Etc and other national franchises drove local business service operations out of the market with lower prices and better services. Now having been acquired by UPS and FEDEX, it is likely that they will have a similar impact worldwide. The family owned and operated full service gas station is largely a thing of the past as national franchises such as Jiffy Lube, Midas Muffler, and AMCO transmissions assumed dominance in the diverse auto repair and maintenance specialties and the large international petroleum companies integrated forward to control the end-user. None of these things are necessarily bad because they reflect the function of markets driven by lower prices, economies of scale and national branding. But, these examples do suggest that the opportunity structure for small business changes and perhaps in a negative way for small business founders and owners.
On the other hand, large companies around the world appear to be moving away from the internalization strategy that drove them a generation ago towards vertical integration. Global competition puts a high premium on low costs and efficiency; large vertically integrated firms tend to slowness, bureaucracy, and inefficiency. The result has been several decades of downsizing and outsourcing. As various business functions are spun-off to independent contractors at home and abroad, firms are able to focus on their perceived core competencies. All of this creates business opportunities for former employees and others who see entrepreneurial opportunity in the changing structure of the modern corporation.
Innovative entrepreneurs may find that the economic uplift from more direct foreign investment stimulated, in part, by the MAI, would create new opportunities (Pieretti, 2004). All of the economic, technological, social, and political change embedded in and caused by the MAI may be potential opportunities for those capable of seeing them. Large firms, domestic or transnational, may have deeply rooted liabilities when it comes to capturing market niches driven by technology or innovative business models. They may be so committed to their technology, that they deny the market viability of innovative new products (Smith and Alexander, 1989). They may be so entrenched in their existing product portfolio that they are unable to adapt to the challenges of a discontinuous innovation (Christensen and Raynor, 2003). Their organizations may be so embedded in existing structures and processes that they are unable to exhibit authentic entrepreneurial behavior.
On balance, it appears as if the MAI would immediately have a negative impact on small business formation and existing small & medium enterprises. But this might be a transitional phase in global economic restructuring. The wild card in this process may be the innovative entrepreneur. The impact of MAI appears to put a premium on innovative entrepreneurship. If the MAI becomes the new international regulatory regime for TNC, then nation-states may be better advised to put strong emphasis on nurturing innovative entrepreneurs through entrepreneurship education and training, incubators, small business development center and mentoring programs, technology commercialization and transfer programs, and inducing the inward flow of early stage seed and venture capital. These are productive initiatives that can be pursued without violating the intrusive demands of the MAI on nation-states.
Private equity capital is one of the most important resources for a vibrant entrepreneurial community. U.S. venture capital firms first spread to the U.K. and Western Europe (Ooghe, et al. 1991) and later to Japan and places like Singapore (Ray, 1991). As advanced developed countries became saturated with venture capital funds, many developing countries initiated regulatory reforms, making them more attractive for venture capital firms (Wright, Purthi, and Lockett, 2005). Opportunities for transnational investment by foreign venture capital firms arise in countries with limited domestic supply (Aylward 1998). Venture capital can help stimulate domestic markets by creating exit opportunities in foreign markets (Maula and Makela 2003). Regulatory reform and economic development created perceived investment opportunities (Gompers and Lerner, 1998). Thus, venture capital markets in Singapore, Taiwan and Hong Kong have become well established (Kenney et al. 2002) and, more recently, India has emerged as an attractive market due to the IT and business outsourcing revolution transforming the country. The international diffusion of venture capital is happening without the institutional support of a MAI. This diffusion has become interesting to international agencies such as the World Bank and the OECD who recognize its strategic role in economic development and in creating a stronger foreign investment climate (Baygan and Freudenberg 2000; Kenney et al. 2002)9
Wright et al. (2005) observe that the existence and enforcement of laws supporting investment is an important issue for financial investors (2005: 141). Legal enforcement is probably highest in the U.S., high in Europe, and “erratic to non-existent in certain parts of Asia (Bruton et al. 2003). Leeds and Sunderland (2003) comment that a major reason for the problems experienced by private equity funds that entered emerging markets in the 1990s was that the legal and regulatory framework did not provide adequate investor protection and dramatic differences in accounting standards, corporate governance and exit potential. Wright et al (2005) conclude that where successful new VC markets such as Germany, India and Israel have developed these have spurred cultural, economic and regulatory changes that make continuing VC success in these markets likely. If national differences remain and change only slowly, that suggests, in the eyes of some observers (Wright et al 2005 and Megginson 2004) that VC will expand cautiously market by market and VC firms will need to tailor entry strategies to local market conditions. It is precisely this need for foreign investors to move slowly and adapt extensively that the MAI is designed to fix. We can reasonably observe that the MAI ought to increase the flow of private equity capital to emerging markets and be a positive force in supporting local entrepreneurship.
Globalization and MAI should help promote entrepreneurship from outside the nation-state. That may not reflect a greater flow of opportunity but a greater capacity to recognize opportunities not seen by the local population. Globalization imports tangible and intangible resources in the form of entrepreneurial individuals, their experience, capital, and social networks. Kirzner (1985, p. 7) uses the term “alertness” of the entrepreneur to opportunities in a way that captures what outsiders bring to the process. Uninhibited by the social myths and doctrines of an indigenous population, immigrants and expatriates are able to see what others cannot. Thus, the global movement of entrepreneurs is a positive economic phenomenon although the political and social consequences may be destabilizing (Chua, 2004). As Amy Chua in her book World on Fire (2004) describes, when ethnic entrepreneurs dominate a local economy, as overseas Chinese often do in Southeast Asia, hostility from the local population sometimes takes extreme and violent forms.
If globalization allows people and entrepreneurs to move more easily across national borders, then it may infuse entrepreneurial energy into communities. Research literature suggests several mechanisms by which ethnic entrepreneurs promote international business transactions such as trade and investment. According to Grief (1993) ethnic networks provide community enforcement of sanctions to deter violations of contracts in a weak international legal environment. MAI presumably would obviate the need for ethnic enforcement of contracts. But given the reality that MAI will only effectively reach those countries with strong legal regimes, it probably doesn’t replace such networks but simply reinforces them. The evidence of overseas Chinese entrepreneurs in Southeast Asia suggests that they tend to replace local entrepreneurs not stimulate them (Gosling and Lim, 1983).
Ethnic networks also encourage FDI by providing foreign investors with important information with respect to domestic markets, local government regulations, and potential business partners that may otherwise be difficult to obtain (Gould, 1994; Rauch and Casella, 1998). The MAI may thus diminish the need for the information function of ethnic networks and open up foreign investment to a wider range of immigrant, expatriate, and international entrepreneurs.
If the MAI created less risk and a more stable legal and political environment for foreign investment, in general, that should lower the cost of foreign investment by early stage or international start-up ventures. However, various types of business risks would remain strong. New ventures would still need to be rigorous in conducting due diligence on potential partners and astute in their deal structuring. Some case analysis suggests that new ventures are more adversely affected by unprofessional business practice than a hostile regulatory environment. 10 As larger, more experienced, and better resourced firms perceive themselves to be better protected by the MAI they may be more inclined to seek out untapped offshore markets thus creating stiffer competition even in niche markets. Competitive challenges may actually be increased for local firms and international new ventures.
If based on innovation, agility, and flexibility, these new competitive challenges by mid-sized or TNC firms may be positive because the spillover effects are likely to be strong. If, however, the outcome of competition in global industries is determined by the ability of mid-sized and TNC to shape the political context of the market so as to avoid competition, then we might have reason for worry about the future of new ventures and smaller firms who would discover a whole new meaning to the phrase the “liabilities of newness and smallness.” A paradox of MAI is that if TNC and their allies have the power to establish a global regulatory regime that suits their interests, they will also have the power to create exceptions that serve only their special interests and unique vulnerabilities?
The actual impact of a Multilateral Agreement on Investment regime might have on entrepreneurship is complex and problematic. Consequently, it is an interesting challenge to entrepreneurship research. The questions posed may deepen our collective understanding of entrepreneurship and its role in economic development, and how external forces influence entrepreneurship. If entrepreneurship were the central focus on national economic development and industrial policy, the quality of local institutions, infrastructure, domestic resource mobilization, and the quality of governance would be critical. Is there, in fact, a relationship between development policy and entrepreneurship, between the quality of local institutions and governance and entrepreneurship? To the extent that entrepreneurship is viewed as a natural outcome of laissez faire and free markets, there may be a tendency to ignore these questions.
Would an entrepreneurial focus define economic development as a domestic phenomenon? The international component of economic development policy in an era of globalization may always be important but it is secondary when entrepreneurship is at the core of development policy. Quality of FDI and its strategic relevance is far more important than some indiscriminate openness to FDI. This has been true in Singapore, Taiwan, South Korea and Malaysia. Significantly, most of the policies of these countries would have been foreclosed by a MAI.
What is the impact of entrepreneurship on the absorptive capacity of a national economy? FDI without local absorptive capacity simple ends up exploiting whatever mineral or human resource available for exploitation. Does entrepreneurship or employment in multinational corporations best nurture the skills and competencies of a people? The question cannot be answered as posed because the key issues are more complex. If entrepreneurship is seen as small business formation without innovation, growth, or an international orientation, then perhaps the “spillover” effects of FDI will do more to raise the knowledge, skills, and competencies of the local population. But if education and public policy nurture, innovative, growth orientation and international entrepreneurship, then the answer may be very different.
Among other questions raised by MAI with regard in the context of public policy include:
On the surface, TNC and technology entrepreneurship appear to be compatible. TNC can be an important source of funding through corporate venture funds, strategic partnerships in R&D or marketing, and a source of harvest events. There is plenty of this kind of collaboration in developed countries. Is the relationship likely to be so positive in developing countries?
The evidence that can help answer these questions will come from diverse locales from around the world and diverse industries. For example, the evolution of high technology clusters in Europe and North America might provide some evidence since so many TNC are located in these two regions. However, the impact of TNC on host country markets may be largely negative. Better evidence might be secured from the Asian NICs (New Industrialized Countries), China and India. With the exception of Hong Kong and Singapore, these countries have imposed tight constraints on foreign investment and the free flow of international capital and this seems not to have hampered their development.
MAI is in conflict with evolving global civil society. Global civil society is a young and evolving concept but embraces, among other things, the democratization of the global economy (Bello, 2003, pp. 113-14).11 This is important because entrepreneurship and especially innovative and international entrepreneurship may flourish within an environment that not only needs property protection but local autonomy and the capacity to innovate. If the MAI threatens global civil society and the values of democracy, participation, autonomy, and innovation, it may be a mistake to link entrepreneurship too close with neo-liberal economics or the ideological rationale for MAI. Why?
With regard to the latter point, the MAI is unlikely to reduce uncertainty, risks, or transaction costs.
The major proportion of the transactions costs associated with foreign direct investment is likely to arise from differences in language, culture, politics and the general business climate of the host country. Familiarizing oneself with the investment laws of a country seems trivial in contrast to these more daunting challenges that exist regardless of whether the country is a signatory to a multilateral or bilateral investment agreement (Hoekman and Saggi, 1996, p. 16).
Maintaining a hierarchical relationship between rich and poor countries may, ultimately, be an important goal of the MAI (McCann, 2003). That relationship may destabilize the global system in the long-term.
The public debate about MAI has obscured some of the critical underlying issues. Opposition to MAI was the rallying cry of anti-globalization activists on the left and right. However, it would be a mistake to associate opposition to MAI as anti-globalization or even anti-free trade. MAI represented the wrong kind of globalization. It represents globalization for the richest and most powerful corporations in the world.
A stronger emphasis on local but globally linked entrepreneurship, new venture development, small and medium enterprise would be a globalization “from below” or what Brecher and associates (2000) describe as “the Lilliputian strategy”. A related term that has been used is “economic direct action”, which has been described this way:
Economic direct action schemes can help create more participatory economies, where people become more conscious of their roles as economic actors. Instead of allowing global markets and actors to determine what kinds of economic development will take place in a region or locale, citizens combine their efforts to define their own economic options. The aim is to encourage people to think about the economy in ways that empower them rather than perpetuate dependence on corporations and remote sources of finance. (Smith, 2005)
This is what entrepreneurship is about and there is an untapped affinity between some advocates of global civil society and entrepreneurs.
An alternative globalization wouldn’t necessary be less oriented to international trade or investment. It would be less oriented towards TNC, less dominated by bigness and less dominated by rich, hegemonic countries and the family of institutions created at Bretton Woods, e.g., the IMF, IBRD (World Bank) and WTO as a successor to GATT, which replaced the aborted ITO (International Trade Organization). It would be a globalization based on choice at the individual, community, and national level. It would not be a globalization driven by a monolithic vision of one standard imposed on all by a few. It would be a globalization consistent with national sovereignty and local autonomy, representative government, civil liberties and human rights, and environmental sustainability.
An alternative globalization would not seek a single comprehensive regulatory regime. It would not allow space for diversity and local initiatives including local regulation. The “national treatment” clause of MAI would reject the federalism built into the constitutions of the United States and Canada, which allow local states and provinces to regulate most commercial activity within their borders. Federalism, in the United States reserved to the states all else that was not assigned to the national government and this is enshrined in the 10 th Amendment. In contrast, under the MAI everything was subject to “national treatment” unless it was explicitly excluded. This is a telling reversal of the concept of distribution of power between central government and the provinces under the concept of Federalism.13 For its part, the European Union was keen to ensure that the MAI obligations applied to all levels of government (Hinton, 2003).
Resources, such as private investor seed money and venture capital, would be free to move across borders under an alternative globalization but the further away a particular resource the more problematic would be access. Flight capital and the absence of equity finance for new ventures have been long standing problem in Latin America. “Flight capital” is the outward flow of capital by the rich individuals in Latin America and other regions who fear currency and political instability. However, flight capital could be structured, under conditions of an alternative globalization, so that it would be drawn to venture capital firms in the United States and Europe, denominated in US dollars or Euros, and reinvested in Latin America or elsewhere through venture capital branch offices in attractive industrial clusters. What otherwise would be unproductive investment in U.S. and European real estate and portfolio investments could, in fact, become productive investment in local, growth-oriented enterprise. If the limited partners of venture capital firms included major department stores, retail chains, or even technology-oriented universities in Latin America, the international flow of capital could link entrepreneurs and their ventures with sources of local technology and distribution channels. The international flow of capital can either be negative, neutral or positive depending on institutional arrangements and the logic of that capital.
Democracy is an essential component of global civil society. Is democracy a necessary precondition to entrepreneurship? Democracy is a foundation for entrepreneurship if not a necessary condition. Democracy implies the freedom of individual initiative and freedom of thought, speech, and action. These attributes support innovation and creative recognition of opportunities. As Shane (2003, p. 154) put it, “political freedom is the freedom from being subjected to the will of others. It encourages opportunity exploitation….” However, the relationship may not be so simple and direct as we would hope it to be. Market economies can exist under both conditions of democracy ( Canada, U.K., and the U.S.) and under conditions of fascism (Nazi Germany). Technology innovation, especially military technology, thrived under conditions of secrecy and severe regulation during the Cold War in both the United States and the Soviet Union. Entrepreneurship has also thrived under autocratic regimes. Perhaps the most notable example is the entrepreneurship that existed in Imperial China. Business people were at the bottom of the social ladder and imperial rule was autocratic and often repressive. But further from the center of power, the greater the room for maneuver. What Beijing under imperial rule could not dictate, MAI under modern governmental, communication, and technological conditions could dictate.
MAI was defeated within the OECD in 1998 and it was temporarily pushed off the WTO agenda (placed there by EU and Japan) by the protests in Seattle in 1999. Reflecting the interests of large TNC, their trade associations, and their home governments, it continues on the global agenda. Concurrent with the OECD negotiations, talks within the IMF had been taking place to reform clauses of the founding charter of the IMF that would create many of the same rules as the MAI (Khor, 1998). At the same time, the UN Conference on Trade and Development (UNCTAD) had been developing proposals for a Multilateral Framework on Investment. It remains a contentious issue within the WTO.
Why the push for an MAI? In TNC-host country negotiations over the years, corporations have hardly been toothless tigers. Ha-Joon Chang (2004) suggests this hypothesis:
The current process of globalization can be reversed, if it is not carefully managed. This is because under-regulated globalization can lead to instability and stagnation, thereby leading to political discontents and policy reversals. This is exactly how the earlier phase of globalization had been reversed between the First World War and the Second World War, and we have every sign that the world may be moving that way again. (p. 709)
Certainly there are some potential triggers of such as reversal in the global community including (1) nearly 9 trillion US foreign debt and potential financial crisis if, among many other contingencies, China began to unload some of its huge US dollar holdings, (2) spread of the current Middle Eastern conflict to Iran or beyond, (3) oil prices going past $100 or some disruption to global oil supplies, (4) economic stagnation or recession in the United States and/or European Union or (4) conflict in some regional “flashpoint” such as North Korea, the Indian-Pakistan border, or between China and Taiwan.
While these risks are serious and compelling, we suggest an alternative explanation. The call for regulation of TNC has grown steadily on a variety of fronts. There are corporate reformers who want more effective avenues of control by shareholders, particularly large institutional shareholders in the United States. There are anti-corporate campaigns, which might have been perceived by TNC and their associations as increasing in number and effectiveness. These included the campaign against the labor practices of firms like Nike and Reebok in Southeast Asia, legal action against Unocal as a result of its activities in Burma, and the diverse opposition to the environmental practices of TNC around the world. Global warming, greenhouse gases, labor practices, complicity with dictatorial regimes, human rights issues, animal testing, biodiversity, and various other issues championed by non-governmental organizations (NGOs) might legitimately been seen as a constant nipping at the heels of corporate decision autonomy. MAI is a tidy way to wrap up all this opposition and put it aside in one neat package. The irony is that the original MAI mobilized NGOs and galvanized a fragmented anti-globalization movement into a powerful increasingly networked opposition.
With the passage of time since the initial defeat of MAI, the call for regulation has continued to grow. The Global Compact proposed by UN Secretary-General Kofi Annan is a multi-stakeholder initiative that gained much attention since introduced in 2000. The architect of the Global Compact, Professor John Gerard Ruggie, described it as a “social learning network.” It is designed to generate “shared understandings” about how companies can help promote UN principles within corporate domains (Ruggie, 2003). While the Global Compact did not contemplate sanctions for companies, there is clearly a risk that unfulfilled commitments within the framework of the Global Compact will evolve into a call for greater shareholder accountability if not a regulatory system.
Currently, voluntary mechanisms for corporate accountability seem attractive not only to business representatives but to NGOs, as representatives of an evolving global civil society movement. The latter see multi-stakeholder initiatives and certification institutions as a promising way to steer business behavior towards more social and environmental responsibility. NGOs warmed to this approach after experiencing disappointment with inter-governmental forums. However, in a highly fluid situation, it is possible that dissatisfaction with voluntary initiatives will boost the demand for a creating international legal framework that is agreed upon and enforced by states (Koenig-Archibugi, 2004). A renewed emphasis on mandatory mechanisms is evidence in the current dispute about the norms on TNC responsibilities that have been adopted by a UN panel of independent experts in August 2003 (United Nations, 2003). These norms bring together a range of obligations drawn from existing international human rights, labor, and environmental conventions, and are widely seen as a first step towards binding regulation and monitoring of TNC activities by UN bodies, backed by national enforcement (Koenig-Archibugi, 2004). While celebrated by NGOs, global business organizations such as the International Chamber of Commerce and the International Organization of Employers have condemned them for embodying a “legalistic” approach to corporate social responsibility. Thus, the provisions of the MAI continue to be pushed through various organizational bodies. The struggle is about what kind of accountability and regulatory regime will define the global economic system and an evolving global civil society.
Hinton (2003) observers that there is little or no chance “whatsoever of the WTO forum reaching agreement on an international framework for investment that would be any where near the ambitious shape of that proposed for the now-defunct MAI of the OECD.” This perspective may under-estimate the power and tenacity of TNC and their lobbies in the pursuit of their interests. MAI provisions have long been pushed in bilateral investment agreements between rich countries and poor countries of the Southern Hemisphere albeit on a more flexible basis. By January 1997, when MAI was center stage within the OECD, there were 1,330 bilateral investment treaties in 162 countries up from fewer than 400 treaties in the early 1990s (Malhortra, 2004). MAI was also a key component of the NAFTI agreement. Despite defeat in the OECD and postponement in WTO, it remains on the international agenda.14 The intent has been to pass the MAI within smaller international governmental organizations with a more like-minded membership and then extend it incrementally to other parts of the world. For example, the original OECD version of the MAI initiative was to clearly intent on expanding it geographically.15 Grewal (2005) describes the dynamics of global policy integration in which a group of countries establish an agreement and network power compels others to comply even when not included in the original negotiation. The MAI is an issue worthy of investigation on a number of research fronts and in a wide variety of countries.
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1. See Appendix A.
2. This is a seminal work on the state of the regulatory regimes of TNC.
3. If the position of OECD countries is so pro-TNC, have the public policy benefits of entrepreneurship really been absorbed into the policy consciousness of the United States, Canada, and the EU?
4.Offset and counter-trade are examples of widely used local content requirements.
5. It is not just about economic liberalization but creating an investment regime that will gradually become global. The contradiction with liberalization is that some international body, the OECD, WTO, IMF, APEC with supranational powers will enforce a single set of standards, e.g., regulate nation-states, provinces, and communities with regard to a wide range of issues. It might be argued that the issue isn’t about eliminating regulation but shifting the locus of regulation vis-à-vis individual, community, national, and corporate rights. Some have characterized the MAI as a “bill of rights” for TNC.
6. McMullan (2006) writes about the “centrality of the entrepreneurial role in economic development”.
7.Jagdish Bhagwati (1978) former advisory to the GATT and a noted development economist uses anecdotal evidence and David Rodrik (1998) uses more systematic evidence to demonstrate this point.
8.In 2006, 17 of 18 Executive MBA students at the American University in Bulgaria worked for European-based transnational corporations suggesting that Bulgaria was become a branch plant/branch office extension of large European firms. In Singapore, over 90 percent of 106 students enrolled in a yearlong course in entrepreneurship aspired to be employed by TNC that dominated the national economy. In this context, TNC influence social and cultural norms of a local community away from entrepreneurship and towards employment with foreign firms. See Shane (2003, p. 157) on the role of social and cultural norms.
9. Venture capital signals a certain level of sophistication in national capital markets and creates a larger, more attractive supply of local joint venture partners or acquisition targets.
10. Two examples include “America China Enterprises” Harvard Business School 9-597-012 (October 11, 1996) and “Odysseus, Inc.” Harvard Business School 9-284-064 ((1984).
11. “Deglobalization” is a term used by Bello but that doesn’t seem the appropriate term any more than anti-globalization fits global civil society, which is about an alternative kind of globalization that places emphasis on communities, democratic processes, and human development. It involves economic direct action and more participatory economies, which seems to be the essence of entrepreneurship. There is, unfortunately, a huge ideological gulf between the advocates of global civil society and entrepreneurship.
12. The sociologists C. Wright Mills made a similar observation about big business within the United States in the late 1950s, The Power Elite.
13. Shane (2003, p. 156) asserts that, “the exploitation of entrepreneurial opportunity is facilitated by (political) decentralization.”
14. Until the collapse of the WTO Ministerial Meeting in Cancun in September 2003, the industrial countries maintained intense pressure for inclusion of four issues (investment competition policy, trade facilitation, and government procurement) on the agenda. Investment was probably the most important issue. After Cancun, investment issues have been on the backburner but not exactly off the agenda (Malhotra, 2004, p. 722).
15. During the campaign against MAI, it emerged that the European Union was seeking to include signing up to the MAI as a condition for the renegotiation of Lome Convention. This was a long-standing agreement under which the EU gives some preference to 70 African, Caribbean and Pacific countries, most ex-colonies of European nations.
Copyright remains exclusively with the author.