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The Influence of Multinational Corporations:
An International Political - Economics Perspective

by June Kaminski, MSN

“Multinationals now function in a global, political economy:
global because borders are disappearing between markets,
political because national politics and policies still matter.”

- (Lorraine Eden, 1994, page 2)

Introduction

Lowe (1992) described the “new world order” as a business world that believed in economics, instead of political ideology. In the 1980s and 1990s, the new theology has become capitalism, and multinational corporations are the “high priests” of this new order. Many multinational corporations (MNCs) are surprisingly larger than most of the nations they do business with. Only eight nations out of the world’s 213 nations, report gross domestic products (GDP) greater than the assets of the world’s top banks. Most of these profits are produced by MNCs. The United States leads the growth figures produced by these eight nations. In 1990, General Motors, the largest multinational corporation had revenues larger than 89.7 percent of all the nations on the globe. Overall, monopolistic or oligopolistic corporations control over 85 percent of world production and trade.

Lowe (1992: 7) described a “free-wheeling global business climate in which big business can operate almost at will”. In all countries, including the United States, MNCs have become increasingly influential in setting government policy, at both federal and state levels. Over time, a reversal of roles has occurred between government and corporations. In business and economics, the role of the government has receded into the background, with a recognition that national borders are actually a hindrance to economic development. MNCs affect the political and legal environment in their home country as well as the affiliate host nations, influencing the laws and agreements governing interactions among countries.

With the growth of the global economy, changes and transitions are experienced by all players in the world political economic arena. Far-reaching changes are everywhere - in international relations, domestic politics, economics, and the corporate milieu, which affects decisions made by policymakers, entrepreneurs, and employees in developed and developing countries alike. Every country has made policy changes to accommodate MNCs, in the role as source or host country.

The United States has long been recognized as the pre-eminent land of MNCs, as well as one of the prime source countries in the global political economic arena (Pugel, 1985). Dunning (1985) attributed distinctive qualities evident in MNC which differ from traditional, uninational companies. MNCs are usually highly productive and profitable, prone to engage in international transactions, and tend to be both vertically and horizontally integrated. MNCs help to raise technical and sectoral efficiency through corporate efficiency, and linkages with suppliers, customers, and competitors around the globe.

Dunning (1985) also points out that the contribution that a MNC makes to the economic milieu depends significantly on government policies. MNCs are an integrating force in the world economy, but how useful this integration is to developing countries depends on the policies set by governments, as well as the trade agreements in place. Government policies, whether general or specific to MNCs, affect the contribution that MNCs can make to the economic structure of a nation and any restructuring that follows. Dunning hypothesized that the effect government policies have on the international division of labor depended on whether they were made with a continentalist perspective or a nationalist one. He believed that if governments were to foster the most economic benefits possible from MNCs , they should intervene only in the flow of goods and resources across exchanges to counteract market distortions and monopolies. The rest of the decision-making that goes along with running a massive corporation should be left to the experts - the MNC executives.

It has become very difficult for governments to direct and control MNCs, even in America. Control over money, trade routes, goods and services afford MNCs great power in the international global economy. MNCs have a profound international presence, commanding deference and attention wherever they do business. Lowe (1992) identified the one distinctive characteristic that separates MNCs from other large businesses: MNCs seriously affect people’s personal lives as well as public policy. They are the aristrocrats of the business arena. In recent years, their chief executives have stood on equal ground with presidents, prime ministers, and statesmen in determining the world economy and how it will be run.

International treaties and laws play an important role in the conduct of global marketing. Although no enforceable body of international law exists, certain treaties and agreements respected by many countries profoundly influence international business operations. With the advent of the NAFTA and European Commission (EC), as well as alliances with Pacific Rim nations, the political economic structures of nations have all experienced transitional processes. New constitutional and treaty agreements currently institutionalize the privledges of capital on a global scale- which undermines the sovereignty and political autonomy of nation-states, as well as macro-associations, such as the EC. From this vantage point, the Third World developing countries have become fragmented, divided, and weakened, in an economic way. Politically and socially, these countries have always been diverse and culturally distinct. “US policing and survelliance power is linked , albeit indirectly, to social forces which serve to sustain internally neo-liberal policies in the Third World,” (Hettne et al, 1995: 72). Affluent, often Western- educated urban dwellers in the Third World have been the primary recipients of the subsidies and World Bank loans. In a large part, the new global financial system operates systematically in favor of financial interests, for the benefit of a very small portion of the world’s population. In recent years, a new constitutionalism has established a process where government policies are increasingly accountable to national and international capital and market forces exercised by finance markets. “Credibility with financial markets is, for governments, becoming more important than credibility with voters,” (Hettne et al, 1995: 79). A move to free monetary control and policy-making from direct political control and to target for long-term price stability has occurred on a global scale, including in the USA.

As well, a redefinition of the role and purpose of government within the emerging “new world order” has been common. More and more, finance has become the principal medium of social exchange. Social relations have been conditioned by market forces and practices. Capitalistic practices increasingly pervade activities of everyday life: leisure, play, in the process of consumption and so on.

Hettne, Cox, Gill, Van der Piji, Rosenau & Sakamoto (1995) described the current global political economic situation as a time of transformation or being in the middle of a transition stage. The world economy has become internationalized through increases in world trade and the spread of MNCs. These changes deeply affect the governments’ ability to control national interest rates and to set contemporary fiscal policy (Lowe, 1992).

MNCs expand beyond domestic borders anticipating the growth opportunities provided by foreign markets. For example, Mexico’s population is rising at almost twice the rate of the US population . Many other developing countries offer similar demographics. As the population grows, purchasing usually grows in the developing nations. MNCs go abroad for other reasons as well. Lower wages, easier union directives, governments with less stringent environmental enforcement, lower tax rates, and such, are offered by countries anxious to expand their industrial front. Most developing countries now welcome new businesses, especially MNCs, because of the increased employment opportunities, new technologies, and additional tax revenue.

Almost half of the top 25 MNCs in the world are American-based, ranging from Exxon to AT & T to Coca-Cola. Most of the top MNCs operate in industries that are fundamental to people’s lives relevant to their comfort, safety, or well-being. Food, medicine, transportation and fuel, weapons, communications, and so on are all under the control, for the most part, of a small number of very powerful and influential MNCs. Leaders of these corporations make daily choices and decisions which affect the world’s population in profound ways, choices critical to international survival, economic security, and global prosperity. Unlike government officials, whose private and public lives are regularly opened to public scrutiny, leaders of the MNCs have enjoyed an alarming degree of privacy and anonymity.

The behavior of MNCs has been deeply influenced by the government and economy of its country of source. “Nationality does shape the bundle of technological, financial, and managerial resources that a headquarters unit acquires in response to earlier challenges, thereby influencing its strategy at later stages,” (Vernon, 1994: 27).

Since the 1980s when the United States first began to be a major host country for foreign investments, MNCs have been looked at differently through American government eyes. Cave theorized that a policy which benefitted the nation’s MNCs at the expense of foreigners would win favor with the average voter. “Source countries will also approve public measures to assist national MNCs in maximizing their rents from foreign markets, subject to conditions relating to the costs of these policies and how they are financed,” (Caves, 1996: 255). The U.S. has sometimes used their MNCs to influence allocations in foreign countries, usually in support of objectives of foreign policies. Caves explains that the “sovereignty at bay” theory is unfounded, since in the past, MNCs had not totally escaped the regulatory power of governments, whether source or host. In recent years, American MNCs have, however, achieved a level of cooperation with their source and host countries, for a variety of reasons.

The 1990s has brought governments to the realization that they need to promote the restructuring of their own resources and institutions to meet the global marketplace challenge. Fostering competitiveness in international markets has superceded concerns about the erosion of national social norms and cultures in many countries. This, despite the fact that MNCs may be the purveyors of resources, values, and behavioral patterns which negatively affect a nation’s citizens. Governments have begun to develop a holistic approach to policy setting, which affects the competitiveness of their resources. Further evolution of world financial markets will continue to be highly sensitive to policy developments (Smith & Walter, 1992).

How much of a role do American financial services have in influencing government policy decisions regarding the promotion of financial market liberalization in developing countries? Apparently - a major one. Multinational corporations and their affiliate financial institutions obviously have a unique and strong influence on the U.S. government's international policy development, and on the governments of host countries, which promotes financial economic and political liberalization in developing countries.

Definition of Terms

Affiliate -- A company owned or controlled by another corporation, often in a foreign country, through ownership of ten per cent or more of outstanding voting stock.

Conglomerate -- A business organization generally consisting of a holding company and group of subsidiaries engaged in dissimilar activities. Usually, a conglomerate expands through mergers or takeovers of other independent companies.

Developed Countries - These countries enjoy well-developed infrastructures, high per-capita income, and large-scale industrial diversification. They are also characterized by low rates of population and economic growth, as well as shifts in emphasis from manufacturing to service industries, such as transportation, communication, and information systems.

Early Developing Countries - Countries who have begun initial development of an infrastructure and have infant industries, usually mining and selected “cottage” manufacturers. Target economic sectors may enjoy high growth rates even though the per-capita income is modest.

Export Processing Zone or Free Trade Zone -- A physically fenced-in industrial estate developed by host country governments to facilitate trade and manufacturing by foreign as well as domestic investors, primarily for exports.

Foreign Direct Investment (FDI) -- The primary measure of cross-border investment by multinational corporations. The FDI involves giving managerial controlling power to the foreign investor (in a joint venture, for example).

International Political Economics - a social science which focuses on the way that the world economy is organized politically, and the connection between politics and economy in international relations (Hettne, Cox, Gill, Van der Piji, Rosenau, & Sakamoto, 1995). Concerned with the historically constituted frameworks or structures within which international political and economic activities take place.

Less Developed Countries - Countries with primarily agrarian and/or extractive economies. High birth rates, and limited infrastructures account for the low per-capita income ( less than approximately $410 US dollars per year). Electrification is limited to the main population area. Includes China, India, and most of Africa.

License Agreement -- A contract made by a multinational corporation with a subsidiary or local company for the use of a brand name, trademark, patent, or copyright of a product for a specified duration of time. Payment may be in the form of a fee, sales percentage, or royalty.

Major Developing Debtor Nations - Countries that have foreign debts to banks or official institutions such as the IMF and World Bank. Includes Argentina, Brazil, Chile, Colombia, Egypt, Korea, Peru, Philippines, Poland, Russia, and Venezuela.

Merger -- An amalgamation where two independent corporations agree to join together their equity and capital together to form a new single company. In a takeover, one corporation acquires control of another company without mutual agreement.

Multinational Corporations (MNCs) - an enterprise conglomerate consisting of a parent core organization located in the source country, with affiliate units dispersed throughout other host nations. All sectors draw on a common organizational network with common technical, financial, and human resources.

Portfolio Investment -- This is investment which goes into the financial sector in the form of treasury bonds and notes, stocks, money market placements, and bank deposits. Portfolio investment involves neither control of operations nor ownership of physical assets. Portfolios may include equity, but portfolio investors usually do not get involved in operations. Portfolio investment is typically of a more speculative nature, responding quickly to higher returns offered elsewhere as well as to higher risks in the host economy.

Service Contract -- An agreement between a multinational corporation and a domestic company or subsidiary where the former provides the recipient with assistance such as technical services, procurement services, and proprietary technology.

Subcontracting/Offshore Assembly -- A technique used by multinational corporations where the manufacture of one part of a product made in a country is subcontracted to another country to take advantage of cheaper labor. The raw materials are imported from the parent company abroad and processed by a local subcontractor. The semi-finished good is exported back to the parent corporation.

Subsidiary -- A company legally owned and controlled by another corporation because a majority of its shares are held by the latter. The corporation owning a majority interest is foreign, the company where the interest is held will be a foreign subsidiary.

Overview of Multinational Corporations and their Development

Vernon (1994) described common reasons that a corporation could have for deciding to become multinational in organization. Some MNC foreign units are established based on least-cost calculations to minimize the delivered cost of a product or service to a given market or to reduce the cost of providing quality after-sale service in that market. The subsidiary foreign unit might be strategically located to take advantage of low-cost inputs such as labor and raw materials, or other resources. Some units are located on foreign soil to prevent governments from blocking imports to a specific market, or to protect the corporation from the actions of competitor companies.

Multinational corporations pose both short-term and long-term consequences for economic growth. Short-term consequences are measured by “MNC-investment” while long-term ones by “MNC-penetration” (Bornschier, 1984). “MNC-investment has the short-term effect of increasing the economic growth rate. The higher the cumulated investment of MNCs in relation to the total stock of capital and population, that is to say the greater MNC-penetration, as a structural feature of the host countries, the lower the subsequent growth rate of per capita income as well as total income,” (Bornschier, 1984: 31). Fresh investments have short-term positive consequences, while MNC penetration has long-term negative ones. The lowering of the economic growth rate through high MNC penetration has been critical for less developed countries (LDCs). MNC penetration is also linked with income inequality for LDCs. Often policies and priorities in public expenditure by governments favor the dominant power players, including American MNCs, especially in LDCs. The short-term, growth-promoting effects of MNC investment is also significant for LDCs.

In the three decades between 1950 and 1980, most national policy-makers regarded inward and outward direct investment as two separate and unrelated economic phenomena. Government actions towards MNCs were viewed as two-fold. Policies were set that either a) determined the effects on the behavior of foreign direct investors or b) those intended to affect the general economic situation of the nation in question. Development modification, and various social policies were examples. Host governments tended to take action to maximize the benefits and curtail the costs of inward direct investment. If benefits were lower than expected, the MNC was viewed as inefficient or anti- competitive. Government policies and a flawed economic system were not considered as cause or contributing factors in the reduced benefits. Only countries like Japan, and later Korea had governments who sought to include inward investment in their broad national economic planning (Dunning, 1994: 66).

Over the past three decades, laws, regulations, and policies towards MNCs have been modified frequently, on a global scale. Governments have gradually learned to modify and refine their inward investment policies, taking into account environmental conditions, their own inner workings, and technological capacities, as well as the new opportunities that were opening to MNCs. The liberation and deregulation of many markets were the result beginning in the mid-1970s. Coupled with the rapid growth of some industralizing economies, especially East Asia, these activities had three specific results. Number one, governments began to avoid practices and policies which promoted structural market failure. Secondly, the bargaining power of MNCs with host governments grew. Most importantly, global technological advances forced governments to reevaluate their attitudes towards the “internationalism of value-added activities,” (Dunning, 1994: 68).

Outward direct investment was included in the policies of countries like the US, the United Kingdom, and Japan during this era. There tended to be bias against outward investments, which affected tax policies for MNCs. “Rarely, outside the resource based sectors, was outbound investment perceived to be complementary to domestic investment, or as part and parcel of a restructuring of domestic resources,” (Dunning, 1994: 69). Any tax advantages on income earned from foreign investment tended to be neutralized by government policies.

Since the 1980’s the world has witnessed the globalization of the world economy. The merits of a market economy have become significant to home governments. Further advances in information and communications technology has deeply affected the location and organization of economic activity around the globe. Most modern day economies are now both outward and inward direct investors. National governments have become the “enablers and sustainers of wealth-creating activities,” (Dunning, 1994: 70). Governments now examine how they can facilitate the supply capabilities of their own MNCs, by lowering transaction- related barriers, and by supporting the structural deployment of assets within their borders. Still, until the 1990s, little effort had been made for governments to set conditions for corporations and markets to operate efficiently, upgrade their resources and capabilities, or restructure production. Such considerations would cause inward and outward investment to become complementary to domestic investment. Policy redirection reflected a broad realization that global economic forces must be accommodated, to boost national and global economies.

International Policy Makers and Trade Policy Formation

Kudrle (1994) identified three historic foreign economic policy goals: prosperity, autonomy, and security. Kudrle pointed out that national security reasons were mostly unfounded in both analytic and empirical political economic research. Policy development can be unilateral, multilateral, plurilateral, or bilateral (Kudrle, 1994). Unilateral liberalization has been historically common. Significant IFDI sectoral liberalization will come largely from agreements such as the North American Free Trade Agreement (NAFTA). The opening of currently restricted sectors would catalyze further major liberalization. “Bargaining power and special interests, not the national welfare, appear to underlie most sectoral protection,” (Kudrle, 1994, page 165).

Bornschier (1987) described a theoretical model for examining economic policies related to MNC control. An “intervention dimension” continuum was outlined with liberalism and interventionism as the extreme poles. This was coupled with a “restriction dimension” continuum with promotion-restriction poles. The intervention dimension measured the quantitative effect of state intervention in the economy and the corporate sphere, while the restriction dimension described the qualitative aspects of whether policies were supportive or non-supportive toward MNC activity . The intervention dimension included categories of policy distinction, including a) promoting interventionism, b) non-specific interventionism, c) stop-and-go interventionism, and d) restrictive interventionism. Bornschier noted that “stop-and-go interventionism” tactics had become common in many national policies. It consisted of a contradictory combination of restrictive measures against MNCs (including interventions with regard to corporate property rights) and promotion in the form of incentives for fresh investment by MNC. Categorical points along the restriction continuum included policies that a) promote liberalism, b) exert laissez-faire liberalism, c) support stop-and- go liberalism, and d) offer only restrictive liberalism. As a rule, the lower the level of development inherent in a MNC venture, the likelihood that economic policy would be interventionist and restrictive. If a MNC venture was important in another aspect of development, such as educational enrollments, economic policies tended to be less interventionist and restrictive of MNC activity.

Hettne et al, (1995) described a double movement approach to the development of capitalism in the nineteenth and most of the twentieth centuries. Capitalism, the mainstay economic model used by the United States, began with the heady notion of creating an utopian, self-regulating market. Movement was made to keep the economic machine independent from the rest of societal structure to allow the market to operate without social or political constraint. The goal was to make the economical sphere a dominant and unrestricted power in American society. Yet, social and political constrictions did develop, and legislation, insurance, and the institution of industrial relations emerged to produce a welfare state framework in the U.S. economy.

Competition Policies

The 1990s brought a reversed view of economics, both on the domestic home front and in the international arena. As Hettne et al, (1995: 39) described, “ The key criterion today is competitiveness; and derived from that are universal imperatives of deregulation, privatization, and the restriction of the public intervention in economic processes.” Rather than serving as a buffer between external economic forces and the domestic economy, the political forces are now agents for adapting the domestic economy to mesh with the global economy.

Competition policy formally includes two domains a) the regulation and control or monopolization of a market, including the regulation of business practices such as predatory pricing, and contractual agreements that lead to barriers to entry, mergers, and acquisitions and b) the regulation of state aids to industry, including direct and indirect subsidies and the granting of preferential status (Graham and Warner, 1994). The first domain is referred to as “antitrust” or “anti-monopolies” policy. The second domain is usually known as “states aid policy”. In the United States, national authorities in charge of anti-trust enforcement do not generally have enforcement authority over state aids policies. Graham and Warner (1994: 464) point out that “almost any regulatory authority of government has some bearing” on competition policy. Particularly relevant are laws and policies related to intellectual property (patents, copyrights), import-export regulation, and the right of foreign corporations to establish or acquire affiliates within a country. These policies apply to the production, location, growth, and distribution rights of American MNCs.

The NAFTA agreement between the USA, Canada, and Mexico includes a chapter entitled “Competition Policy, Monopolies, and State Enterprises”. The three countries were directed to have a competition law to “proscribe anti-competitive business conduct and to take appropriate action thereto,” and to cooperate with each other to enforce these laws (Graham and Warner, 1994: 464). The NAFTA supported the liberalization of trade and investment activities in North America, but offered little direction for anti- monopolies or state aids policy.

Anti-Trust Laws

Historically, relevant anti-trust laws were instituted in the United States in 1890 in the Sherman Act, which was later expanded through the Clayton Act in the early twentieth century, and further by the Federal Trade Commission Act and Robinson - Patman Act. All four of these Acts had been actively enforced since they were established. The Reagan administration, in the 1980s, abandoned anti-trust efforts and gave the green light to big business decisions, sanctions, and activities. In the later part of the 1980s the Bush government further changed the anti-trust laws to allow free competition by American MNCs to flow uncontested. When a company became big enough, that there existed no viable contenders, to keep them efficient, they could operate in almost any way they wanted to. Anti-trust abuses and price-fixing have proliferated in the US since the beginning of the twentieth century. The same behaviors continue, but now on a global scale, - which is predicted to escalate in the new millennium.

In the past, the United States Justice Department would scrutinize any U.S. corporation that bought a foreign company, or engaged in a joint venture with a foreign firm, or made any agreements abroad with a competing company, with an eye for the competitive effects of corporate activity. This scrutiny was sanctioned by American anti-trust laws. In the 1990s these anti-trust laws have been the focus of much debate, resulting in generous allowances for international marketers who were cooperating to develop foreign markets. Due to ongoing globalization of production, competition, supply and demand, US anti-trust laws have lost their sting, especially for MNCs.

Foreign-based MNCs are still formerly regulated by U.S. laws against bribery and corruption. In 1977, the Foreign Corrupt Practices Act was passed, making it a crime for American corporations to bribe foreign officials for business gain. This stance has been argued by MNCs operating in foreign countries as hindering their capacity to compete in countries where bribes are not outlawed (Czinkota & Ronkainen, 1996). In response to this, revisions to the 1988 Trade Act to clarify the intent and use of the Foreign Corrupt Practices legislation occurred. Policy decisions pertained mainly to situations when contract agreements and retention were in question. The illegal influencing of policy decisions was subject to fines and incarceration. The facilitation of routine business actions, such as obtaining licences and permits, processing government papers such as visas and work papers, cargo loading, and obtaining mail and phone services were not.

It is interesting, that the American government has been influential in promoting anti-trust initiatives in foreign countries, yet allows MNCs from their home soils to operate without serious restriction in this context. On surface examination, the American government has tightened anti-trust laws, but most investigations have focused on foreign-owned MNCs, particularly Japanese ones. Often, American MNCs are allowed to operate in a “business as usual” modi operandi.

Lowe (1992) defined anti-trust violations covered by American law as corporate activities which:
a) allow corporate contracts, combinations, or conspiracies to restrain trade activity

b) encourage the development of monopolies within an industry

c) sanction mergers and acquisitions, whether horizontal, vertical, or conglomerate, to greatly lessen the competition or lead to a monopoly and

) use unfair methods of competition, such as price fixing, predatory pricing, or dumping.

Recently, Americans maintained anti-dumping and subsidies and countervailing measures laws which gave them an advantage over Canada and Mexico, despite the NAFTA agreement. Graham and Warner warned that the “gains from liberalized trade can be offset by the anti-competitive actions of very large producers,” (1994: 467). The NAFTA agreement did not prevent the danger of a merger acquired and managed under foreign control (i.e. American ) emerging as the dominant firm in the local market of another nation, such as Mexico.

Foreign Investment

An economy’s overall acceptance of foreign involvement can be estimated by analyzing the degree of foreign direct investment engaged in by a country in a particular industry, as well as by the rules and policies that pertain to such investments. Restrictions exist mainly by industry type and by country of origin of the investor. In the USA, major foreign direct investments must be reviewed by the Committee for Foreign Investments in the United States (CFiUS). Kudrle (1994:142) points out that despite an obvious political openness to incoming foreign direct investment (IFDI), supported by liberal American policies, “...all nations prohibit or explicitly control IFDI in certain sectors of the economy” . Certain sensitive national industries are considered taboo, and not open to IFDI. Most countries limit the degree of foreign-owned subsidiaries in industries such as public broadcasting, banking, insurance, mineral exploitation on public lands, aircraft, and coast-wide shipping. These controlled sectors of industry are, for the most part, domestically controlled. The OECD has identified three categories of genuine sectoral restriction: a) general authorization and regulation by government policies, b) controls and impediments by sector and c) preemption by state or national authorized or operated monopoly that controls or excludes entry by both domestic and foreign corporations. The motivation for sectoral restrictions has been linked to national security. Recently, changes in sectoral restriction have occurred in several countries, favoring more IFDI, particularly from American investors.

Bergsten (1994:392) described the need for an international agreement and policies to guide foreign investment activities. He observed that “in the last 20 years, the world has seen the development of a regime of sorts in the investment area,”. Bergsten tagged this a “quasi-regime”, observable at multilateral, bilateral, regional, and national levels. Vital to this process was the OECD Code on Capital Movements, coupled with the activities of the Multilateral Investment Guarantee Agency (MIGA), at the World Bank. The NAFTA agreement also offered the impetus for the creation of mutual international investment agreements between the United States, Canada, and Mexico.

Unilateral liberalization of investment strategies have also been observed since the late 1980s, by many nations. The United States had chosen to move in the opposite direction, restricting the inflow of foreign investment into the American market. An example of this was the adoption of the Exon-Florio amendment to the Omnibus Trade and Competitiveness Act in 1988 (Bergsten, 1994). With the swift growth of globalization, the issue of investment policy and directives had become an important topic in the international agenda.

Historically, the American government has attempted to design systematic, activist policies about the operation of the large, complex, dynamic U.S. economy. Traditionally, US government policies had been quite liberal toward inward and outward Foreign Direct Investments (FDI), and more structured in relation to trade policy. Today, policy towards FDI tends to be quite neutral , permitting freedom for MNCs to make independent corporate decisions (Globerman, 1994).

Since World War II, the private enterprise system has been constrained in its’ ability to keep transaction and production costs to a minimum, by the political and institutional structure, and the economic and social milieu in which they operate (Dunning, 1994: 63). Now, governments are beginning to view MNCs as a means to advance the efficiency of their national resource usage, and to sustain or improve their living standards on par with those of other major foreign competitors. “This will occur when outbound direct investment advances the innovatory capacity and the efficiency of resource allocation of the investing country, and when inbound direct investment increase the innovatory capacity and competitiveness of the resources of the recipient economy,” (Dunning, 1994: 64).

Legal and regulatory measures which target international marketers can come from the company’s own country, as well as from the host country. Some of these measures are designed to help and protect MNCs in their international efforts, others serve to enforce corporate conduct guidelines. Through bilateral or multilateral negotiations, a government can reduce trade barriers and increase trade opportunities for MNCs (Spero, 1990; ). Home countries may implement special laws and regulations to ensure that the MNC conducts business within the legal, moral, and ethical boundaries considered appropriate.

Foreign direct investment permits MNCs to circumvent barriers to trade, unaffected by duties, tariffs, or other import restrictions. Government has found that FDI can lead to increased employment and income. More and more, state and local governments are also participating in investment-protection activities. Tension often exists between the government and the foreign direct investor. As a corporation’s size and investment volume grows, the impact and benefits it brings to the domestic and foreign economy increase. Dependence of the economy on the MNC increases as well. Particularly in developing countries, the knowledge advantage of foreign investors may be used for exploitation of the host country’s customs and policies (Czinkota & Ronkainen, 1996).

American multinational corporations have a profound impact on the ways in which the United States is linked to the world economy. American and non-American direct foreign investment and MNCs have expanded so rapidly within the last three decades that they now account for a major part of international economic activity (Walters & Blake, 1992). Their size and growth essentially make MNCs a new international economic institution.

Issues related to American MNC Foreign Affiliation

The rise of multinational enterprises and production systems, which brought easy mobility of capital investment and jobs from one country to another, has obvious benefits as a modernizing influence on the world (Greider, 1993). Lower costs and cheaper prices are welcome results of MNC growth, but the exploitive effects on nations is a concern to many. “As a political system, the global economy is running downhill- a system that searches the world for the lowest common denominator in terms of national standards for wages, taxes, and corporate obligations to health, the environment, and stable communities,” (Greider, 1993: 195). The global competition for cost advantage effectively weakens the sovereignty of every country, by promoting a fierce contest for lower public standards.

Labor Issues

High-paying jobs, previously enjoyed by domestic US workers, have been relocated to developing countries such as Mexico and Malaysia. Mexican workers who toil in MNC plants by day, go home to squalid villages, devoid of hygiene and sanitation, living on deplorable wages. Mexican labor unions have long been integrated into the Institutional Revolutionary Party, and labor leaders do not enjoy the autonomy granted to American ones. Mexican labor officials can not be faulted for believing that liberalization of trade and investment in Mexico may well bring labor economic advantages for workers (Randell, Konrad & Silverman, 1992). Confronted for generations with economic stagnation, most Mexican workers long for the lifestyle enjoyed north of the border. Mexico has initiated an ambitious program of economic reform measures. Adopting the ideology of austerity, they have reduced their fiscal deficit, inflation percentage, state- owned companies, tariffs and eliminated most of their non-tariff barriers. Although Mexico is trying to improve the living standards of its people, the majority of the population still live in poverty and often engage in child labor activity.

Monetary Concerns

Greider (1993) reflects that American politics have moved off-shore. MNCs, able to coordinate production from many different countries, and unify markets across national boundaries, are the only organizations active in all areas of the world (Porter, 1990). From arcane regulatory provisions to national priorities, the corporations, not the governments have become the ultimate decision makers. The question of what is foreign and what is American has become hazy by the logistics of global commerce. Multinational executives work to enhance the company, not the nation. They run stateless corporations on an international level.

Host country critics of American MNCs charge that the corporations take more international currency out of their country than they bring in (Walters & Blake, 1992). Repatriated earnings, charges for royalties, interest, licenses, and various managerial services plus expenses incurred by importing necessary equipment and component products far outweigh the positive effects such as inflow of new capital, savings resulting from import substitution, and earnings gained from exports. There is also voiced suspicion that MNCs are able to hide behind financial complexities, and manipulations to avoid taxes. MNCs are said to be able to use their internationalism to avoid onerous government policies. MNCs are usually fierce and successful competitors with domestic industries. Their large size, huge managerial and financial resources, worldwide reputation, and product recognition often mean that MNCs can literally overwhelm local corporations.

Developmental Economic Growth and Trade Agreements

U.S. based MNCs comprise the bulk of the negotiating parties affected by the new NAFTA accord. In both Mexico and Canada, subsidiaries of American MNCs comprise two-thirds of US foreign direct investment (FDI) (Vernon, 1994). Even before NAFTA, American MNCs accounted for 69 percent of the total exports from the USA to Canada in 1989, and 52 percent of the exports to Mexico.

American laws and policies have always considered the effects of international factors on their national domestic market. The NAFTA directives allows mergers and acquisitions by one country, such as the USA, which may not prove beneficial by the receiving nation, such as Mexico. If the merger provides a North American efficiency gain, enjoyed mainly by the Americans, the negative effects to Mexico tend not to be taken seriously. A North American competition bureau might still allow the merger, despite the fact that most of the dividends would be going to the USA, and cause a reduction in competition by Mexican corporations. Some mergers entail a trade-off between loss of competition and a gain in efficiency. There has been no allowance made in the NAFTA agreement to reduce the USA’s power to use the “less than fair value (LTFV) measures of trade laws for their own benefit, in particular, the anti-dumping (resistance to underpricing) and anti-subsidies measures sanctioned by the General Agreement on Tariffs and Trade (GATT), which has now been replaced by the World Trade Organization (Caves, 1996). The LTFV measures have been growing worldwide, causing bias against importers, and favoring domestic producers in the United States. Low “de minimis” thresholds for dumping determinations aggravate the problem (Graham and Warner, 1994). Both Canada and Mexico sought to eliminate the LTFV laws, when negotiating NAFTA, but the USA policy makers adamantly opposed this.

Anti-predation measures in the anti-monopolies laws are designed to prevent one MNC from gaining market dominance by driving competitors out of the market, which does somewhat curtail dumping in North America. Graham and Warner (1994: 487) suggested that “the central purpose of the antitrust laws is to prevent firms from attaining either market power or monopoly power because firms possessing such power can raise prices to consumers above competitive levels, thereby effecting a transfer of wealth from consumers to such firms.”

Over time, the GATT became outdated, due to the growth of voluntary agreements to restrain trade in the form of bilateral or multilateral special trade agreements. In order to restore GATT’s relevance, a new set of agreements was begun. This negotiation enforced several new directives. Non-tariff barriers were removed, intellectual property rights guidelines were developed to protect patents and trademarks, and trade-related investment measures were created. A key result of these recent negotiations was the formation of the World Trade Organization (WTO), which oversaw and handled GATT agreements and encouraged future international negotiations. The new WTO was launched in 1995 and provided a structured international trade framework for both governments and MNCs. It was the result of an eight-year process of trade negotiation known as the Uruguay Round. The WTO secretariat, located in Geneva, Switzerland, continues to administer multilateral trade agreements, facilitate future trade negotiations, and oversee trade dispute resolution on behalf of more than 120 member countries. The WTO has been predicted to have more influence on human lives than any other institution in the history of mankind.

With the establishment of the WTO, trade agreements now include investment measures, intellectual property rights, every type of domestic regulation, including services. It would be difficult to identify an issue of social, economic or environmental significance that does not come under the scrutiny of this trade regulation.

In addition to multilateral agreements, MNCs are affected by bilateral treaties and agreements. The US government has signed bilateral agreements of friendship, commerce, and navigation (FCN), with many countries. These agreements often guarantee that the MNC will be treated by the host country with the same privileges afforded domestic companies.

The United States has long operated with a large deficit. In recent years, virtually all nations have also developed national deficits. With the Clinton administration, the U.S. government has moved to reform many parts of the economy. The NAFTA and Uruguay Rounds initiatives have opened up strategies which seriously impact on foreign investment agreements with the United States. The American stance has become a quasi-protectionist one, demanding that foreign countries bring down tariffs, open up trade and investment policies, and structure their economic position before the U.S. will enter into negotiations with them.

Nader (1993), warned that MNCs operating under the “deceptive banner” of “free” trade, were working hard to expand their control over the international economy. Using the NAFTA initiative and the Uruguay Round - an expansion of the GATT directives, ambitious goals had been set, particularly for developing country agreements to gain control over Third World economies and natural resources. “It is only recently that corporations developed the notion of using trade agreements to establish autocratic governance over many modestly democratic countries,” (Nader, 1993: 2).

The core principal of international trade policy is to remove impediments to the free flow of goods and services between countries. NAFTA is an agreement which encompasses not only financial matters, investment, intellectual property, and commerce but also dispute-resolution, banking, transport, and services. It eliminates the vetoing power of social, economic, consumer-protection, and environmental regulations. The transfer of resources would have three aims: to improve infrastructure, harmonize standards, and subsidize excessive adjustment costs.

Lipsey, Schwanen & Wonnacott (1994) point out, that like any trade agreement, NAFTA puts some constraints on the policies of all its signatories. For instance, policies that directly impose certain performance requirements that are potentially detrimental to competitors in other NAFTA countries are judged inappropriate, since the aim is to open up borders to competition.

MNCs have voiced their intention to have the freedom to invest anywhere in the world without restriction, and to maintain the rights to intellectual property in the form of trademarks, patents, and copyrights. With the formation of the Multilateral Trade Organization which enhanced GATT’s power over all participating countries, the ability to undermine the power of local, state, or national governments to impose any sort of control over business had been established. The Uruguay Round expansion of GATT and NAFTA helped establish a world economic arena dominated by giant corporations. Nader described these trade agreements as vehicles which enabled MNCs to pit country against country in a race to see who could set the lowest wage levels, the lowest environmental standards, the lowest consumer safety standards, and to escalate short-term profits. The GATT and NAFTA also limited a host country’s ability to exclude exports on the basis of labor, human rights, or environmental conditions. The Uruguay Round allowed MNCs to label sanctions initiated by developing countries as “non-tariff trade barriers” which the WTO trade pact prohibited. Disputes about non-tariff trade barriers were no longer decided by government officials, but by MNC bureaucrats.

Trade Liberalization

Trade liberalization and market integration are the pillars of an ideology in which acquiring income, wealth, position, and power is the appropriate focus of all human activity and the source of all well-being (Grinspun & Cameron, 1993). The multinational corporation, foreign direct investment, and the general free flow of capital, supported by trade liberalization measures, are seen as the joint saviors of Western economy. As MNCs prosper and profits are maximized, economic efficiency is enhanced, product variety and quality is increased, consumer choice becomes diverse, and the general well-being of society is maximized. In this view, the role of governments is to remove hindrances that obstruct the workings of the market. MNCs expect the governments to protect their international interests. Government attitudes and actions toward education and the labor force are being focused more and more on meeting the needs of MNCs.

GATT’s principles of liberalization or opening up one’s national economy to outside market forces, have been applied not only to trade, but also investments and services (Khor, 1993). Third World countries are easy to influence, since most of them face pressures caused by external debt and dependence on World Bank loans. The MTO includes an integrated dispute settlement procedure that enables cross-sectoral retaliation. Undeveloped or developing countries have no choice but to comply. Furthermore, the MTO has agreed to cooperate with the International Monetary Fund (IMF) and the World Bank. The three organizations could synchronize their policies towards the Third World and institute “cross-conditionalities” to pressure developing countries to accept the policies of all three institutions. A single set of policies, instituting an economic mono-culture, driven by three global institutions has been set in place. In effect, developing nations have had their economies placed at the service of MNCs, with limited space for independent policies.

The MTO decontextualizes trade, investment, services, and intellectual property from broader social and developmental issues. These issues are treated through the perspective of laissez-faire commerce, and the overriding imperative for liberalization. The liberalizing of investment movements would open up Third World countries to faster exploitation of their natural resources, and rapid transfer of environmentally harmful investments, projects, and products. Liberalization of services pressures developing countries to accept and receive the cultural and professional services of foreign companies and individuals. Also, the MTO trade liberalization is not balanced by national and international commitments to respect sustainable development.

Influences of MNCs on Developing Countries.

Economic Sanctions

Economic sanctions occupy a key position in the foreign-policy initiatives of most states, especially the USA. Governments use sanctions to signal resolve of global or national resolve and to exert pressure for policy changes, particularly in foreign countries. Although the goals of sanctions are highly political, a country’s ability to use them are subject to the rules of economic exchange ( Martin, 1992). Sanctions are costly for the country imposing them, which allows governments to demonstrate resolve and to send signals to other nations about their policy preferences and intentions. Economic sanctions are used by particular groups, usually financiers, to reap desireable effects on sectors of target countries. The economic benefits gleaned by domestic interest groups imposing particular sanctions can be significant, and worth the confrontation. The United States is unique in its position to be able to impose unilateral sanctions, since it has monopoly power over several sectors of the economic trade market. Countries imposing sanctions usually direct their restrictions against one specific country.

The decision to impose economic sanctions, usually arises from one country posing some kind of economic threat to another country, or group of countries. The threat could be as simple as restrictive trade policies which stifle the sanctioning nation’s global investments or movement. The coercive abilities of the sanction sender depends on the resources it can link to the sanction issue as well as on its credibility (Martin, 1992).

Characteristically, the economy of the sender country is usually much larger than that of the country being targeted, (Hufbauer, Schott & Elliott, 1990). Often, the sender’s Gross National Product (GNP) is over ten to one hundred times greater than the target GNP. When the sender country controls a strategic commodity, their sanction leverage is magnified. Success, depends on whether the sanction hits a sensitive sector in the target nation’s economy. Economic sanctions may take the form of export sanctions, import sanctions, or financial sanctions.

The dominant position of the United States as a manufacturer of military hardware and high- technology equipment has a profound influence on target nations. America has used financial sanctions much more than export or import sanctions. The most common type of financial sanction is the interruption of official development assistance. The majority of cases involve the manipulation of bilateral economic and military assistance to developing countries. The ultimate sanction is a freeze of financial assets held by the target country. Financial sanctions frequently involve or affect pet projects of government officials who are in a position to influence policy. Sanctions are imposed to coerce a target country to alter its policies or financial practices. Sanctions that are least costly to the sender country, i..e. the United States, use financial leverage - manipulating aid flows, denying official credits, or freezing assets, rather than using trade control.

The developing countries are uniquely important to the “new world market”. Wealth and economic growth in the world’s poorest countries is theoretically included in free trade agreements. However, most central development aid projects are only implemented if these countries agree to follow certain rules. Mander (1993) lists these rules as:

a) Must open all markets to outside trade and investment without requiring majority local ownership

b) Must eliminate all tariff barriers

c) Must reduce government services, especially services to the poor

d) Must convert small-scale, self-sufficient farming to high-tech, pesticide-intensive agribusinesses and produce one-crop export commodities, such as coffee and cattle

e) Allow free access to natural resources, such as lumber, minerals, and so on.

In addition to the above set of rules, a second mandate of initiations are required. Developing countries must:

a) Harmonize local and national economies to standards set by trade bureaucracies

b) Change or overlook local laws that restrict access to nature and natural resources

c) Eliminate all non-tariff barriers to trade, such as health, environmental or consumer laws

d) Permit multinational access to all genetic resources and their patenting

e) Permit entry to service industries such as banks and advertising agencies

f) Submit to the discipline of the enforcement powers of trade bureaucracies

If these rules are not followed, the power of the MTO can use extreme economic sanctions, including economic isolation or worse, against them.

Foreign Aid

Developing countries, suffering from a lack of capital funds, have traditionally turned to capital surplus countries for private funds in the form of bank loans and the purchase of bonds to finance infrastructure and production facilities. The United States has been the chief provider of foreign aid since post-war times (Spero, 1990). Aid is frequently used to influence economic policies in recipient countries. For example, the U.S. has placed economic conditions on aid that have shaped monetary and fiscal policy, investment policy, and international economic policy and nationalization policy. Through the supervision of aid projects, the aid bureaucracies in all countries have become involved in decision making in recipient countries. Even the World Bank, has used its aid to promote market-oriented reforms in developing countries. In the 1980s, recession conditions in developed countries prompted the directives that developing countries had to provide incentives and commercial opportunities for private enterprise, both domestic and foreign. Economic aid would have as its main purpose, the support of private enterprise and free markets. The IMF has been criticized for imposing conditions that restrict economic growth and lower living standards in developing countries (Melvin, 1992). The typical conditionality involves reducing government spending, raising taxes, and restricting monetary growth. The IMF has defended their methods by pointing out that adjustment programs are necessary in debtor countries to promote long-run growth.

Inflow of Capital

Jain and Puri (1987) listed benefits enjoyed by developing countries who host American MNCs initiatives. MNC bring in foreign capital to the host nation, role model efficient use of capital for local investors, create a favorable climate for the inflow of other foreign capital and for the receipt of foreign aid, offer modern employee training and managerial techniques, and increase labor productivity.

Bifurcation of the national economy and the developing society is one result of the ability of MNCs to attract scarce factors of production in the host nation (Walters & Blake, 1992). A small, international- oriented elite coexist with the masses of impoverished people in the population. A dichotomous population of rich and very poor are the result.

Technological Developments put MNC Influence Everywhere

The advent of the “technology age” was a prime factor in enabling corporate powers to rapidly accelerate their expansion beyond national boundaries (Mander, 1993). Satellites, high-speed computation, advanced high- speed travel, instantaneous resource transfer, and other global-scale technologies allowed instantaneous contact with and control of its hundreds of distant parts all over the globe. The globalization of television via satellite enabled big business to spread commodity culture and Western material values even to non- developed countries. This has helped create a rapid global homogenization of cultures within a Western economic paradigm. High-speed transportation facilitated the rapid movement of resources and commodities to the world market and unified all the world’s individual markets. The governments of North America, Western Europe, Japan, Russia and the Eastern Block countries all agreed that a global economy run by central corporate interests, with strong support from banks, governments, and transnational trade institutions was the means to greater efficiency, rapid development, and mutual aid. That the international institutions, the banks and bureaucracies must be given sufficient power to suppress resistance from unions, environmentalists, and advocates of democracy, national culture, and sovereignty. The fall of the Soviet communist regime further catalyzed this economic transition. When Soviet communism fell, its demise was heralded as a victory for both market economics and democracy. The trilateral model of a homogenous world economy based on unlimited growth and commodity consumption, removal of economic development barriers, and management of resources by corporations in collaboration with like-minded governments was achievable. Renewed emphasis on free trade agreements with added power to enforce conformity was evident as MNC executives gained economic decision-making power on a global scale. The goal of a unified world development plan under multinational corporate leadership could be realized.

Mander (1993) interpreted the term “market economics” to now mean an aggressive economic arrangement that is centrally structured, has fixed rules of procedure, makes many exceptions in individual cases, and is not free. He deduced that the only freedom provided is the freedom of MNCs to circumvent national laws that would otherwise impede their corporate activities and profits. A “new world order” was initiated, one that allows bankers and developers to plan the flow of the world’s resources and homogenizes the diverse lifestyles, cultures, values, and geography of the world’s nations.

One of the great advantages to nations who host MNCs is that these corporations can afford to invest in equipment and technology which help to build a strong economy and a more efficient social world. Top MNCs spend an impressive amount of money in research and development, important in advancing national initiatives and innovation. MNCs often use acquisition to gain control of industries important to future development - industries such as biotechnology, telecommunications, advanced civil aviation, microelectronics and robotics (Lowe, 1992).

Global Initiatives to Control MNCs

The attempt to create universal guidelines for foreign investment has been made by various organizations, including the United Nations, the Organization for Economic Cooperation and Development, and the International Labor Organization. Issues such as employment practices, consumer and environmental protection, political activity, and human rights have been addressed and included in this guidelines. In various host states, both U.S. and non-American MNCs have been accused of economic imperialism, the fostering of inter-country competition, and the advancement of insensitive business practices (Walters & Blake, 1992). MNCs have become the most visible and most attacked entities in the global economic system. At the same time, nearly every country in the world actively pursues MNC investment in their nation. Foreign investment is seen as a way to get capital funds, technology, managerial expertise, and industrial and consumer products so desperately needed for economic development.

The MTO has been strategically placed outside of the jurisdiction of the United Nations (UN) system, and has depleted the UN influence over global economic affairs. A loss of international-level democracy is inherent in this process, and has rendered global economic decision-making as not accountable to the UN or national mandates.

Financial Privileges of American MNCs

Credit Eligibility

A shift in credit eligibility has occurred in the 1990s for American multinational corporations of all sizes. Even mid-sized multinationals have enjoyed being approached by American bankers to finance their international trade transactions (Czinkota & Ronkainen, 1996). Promises of flexible, cut-rate financing are offered, spurred by the movement of national banks to expand to include foreign investments as a survival technique. Efforts by the Export-Import Bank of the United States (Eximbank), the federal credit agency that guarantees and insures loans made by commercial banks, has made trade financing enticing to bankers. Eximbank has expanded its guarantee on export loans to 100 percent and has “developed a program whereby banks can pool and scrutinize small trade loans and thus wipe the foreign-country risk off their books,” (Czinkota & Ronkainen, 1996, page 124).

Other public sector financing sources for American conglomerates include the Overseas Private Investment Corporation (OPIC), a federal agency that offers investment guarantees to U.S. manufacturers who intend to establish factories in less-developed countries, either on their own or as a joint venture with local capital. OPIC also offers political risk insurance, protecting MNCs from currency inconvertibility, expropriation, takeover, and physical damage resulting form political discord. The Agency for International Development (AID) manages the majority of the economic assistance programs for business offered by the American federal government. In 1988, an affiliate of the World Bank was created, the Multilateral Investment Guaranty Agency (MIGA). MIGA is authorized to issue guarantees against noncommercial risks in host countries, enabling investors to test the market on economic and financial grounds rather than political risk.

Tax Benefits

Tax benefits are another way that MNCs are supported by the American government. A tax mechanism called the Foreign Sales Corporation (FSC) assists exporters. Tax deferrals and benefits enable the MNC to offer products at a lower cost in foreign markets or accumulate a higher profit. The American Department of Commerce actively encourages US exports to foreign countries. Its mission is to increase the international marketing activities of American firms.

Taxation policies allow source countries to defer foreign profits taxes for MNCs until they were repatriated (Caves, 1996). The USA government has made changes in policies to facilitate MNCs in behaving monopolistically in foreign sales and purchases, but competitively in domestic transactions. As Caves (1996:247) points out, “a country gains from any policy that can aid its national firm to shift to higher-profit equilibrium in competition with a foreign rival”. Caves proposed a behavioral approach to public policy, which assumed that government decisions resulted from self-interested parties interacting in a political setting.

Export Legislation

Export trading company (ETC) legislation designed to improve the export performance of medium sized corporations has been implemented in the USA. Bank participation in trading companies is accepted, to allow ETCs better access to capital. A relaxation of anti-trust provisions also facilitated joint foreign ventures.

Summary

Multinational corporations have become the new “rulers” of the economic world. No country is immune to foreign investment and economic management by MNC executives. The multinational corporation, foreign direct investment, and the general free flow of capital, supported by trade liberalization measures, are seen as the joint saviors of Western economy. As MNCs prosper and profits are maximized, economic efficiency is enhanced, product variety and quality is increased, consumer choice becomes diverse, and the general well-being of society is maximized.

In this view, the role of governments is to remove hindrances that obstruct the workings of the market so that MNCs can go about their business, unrestricted. MNCs expect the governments to protect their international interests. MNCs tend to gravitate towards developing countries to take advantage of extremely low labor costs, rich natural resources, and lax environmental and social policies. Third World countries are easy to influence, since most of them face pressures caused by external debt and dependence on World Bank loans. The liberalizing of investment movements opens up the Third World countries to predatory exploitation of their natural resources, and rapid transfer of potentially detrimental investments, projects, and products. Liberalization of services puts pressure on developing countries to accept and receive the cultural and professional services of foreign MNCs and the executives who run them.

MNCs have become the most visible and most attacked organizations in the global economic system. At the same time, nearly every country in the world actively pursues MNC investment in their nation. It is strongly predicted both by supporters and critics that MNCs will enjoy an economic monopoly in the coming millennium, and have a strong say in how trade is done, and life is lived, all over the world.

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