Estratégica metodológica.

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possibly be accepted by ASEAN).

The trend of development of international investment regulations in the context o f the changing international economic system has been driven especially by the activities o f transnational corporations (Dunning, 1993; Michalet, 1994: 9-12). The development process of international investment regulation, and of international law on foreign investment and national investment laws, interact with the evolution of the international economic and political system, as well as the globalisation process (Dunning, 1992: 7-45). These developments have implications for investment policy adjustment and the development of investment laws and regulations in the ASEAN countries not only to enable them to keep pace with rapid change in the global economic system, and be consistent with the global regulatory regime, but also to facilitate the implementation of ASEAN open regionalism.

I will firstly analyse the role of transnational corporations in changing the international economic system, and consider the interaction between the regulation of foreign investment and the global economic system. Secondly, I will analyse the debates around the global regulatory regime for foreign investment. Finally, I suggest how ASEAN countries should respond to this trend, and adjust their economic policy and develop their national investment laws and regulations in harmony with the changing global regulatory regime. In the same time such legal and policy changes would facilitate its open regional investment area.

3.1 The Role of Transnational Corporations in Changing the Global

Economic System and its Implications for Nation States

3.1.1 T ran sn ation al C orporations and the C hanging G lobal E conom ic System

The growing role of transnational corporations has not only contributed to the rapid economic development of the world economy (Dunning, 1974; UNCTAD,

1995b), but have also changed the very nature and structure of the international economic system (Michalet, 1994). This dramatic change is a result o f the emerging process o f integrated international production, and the proliferation of cross-border linkages (UNCTAD, 1993), which are mostly the activities o f transnational corporations networks.

The world economy is totally different today from that of fifty years ago. At that time, the classical trade theory was uni-dimensional, only focusing on trade among nations. The benefits of free trade and the subsequent optimal allocation of resources were considered to be essentially related to the exchange of goods and services among nation states based on the principle of comparative advantage (Ricardo, 1951-55). Generally, capital flows, technology transfer and labour migration are excluded from this model (Michalet, 1994: 4), and comparative advantage is determined by the factor endowments of nation states. These endowments - labour, capital, land and technology - must be subject to constant returns to scale. According to the static comparative approach, factor immobility within the borders of a nation state is the most crucial determinant. Country borders determine the characteristic of the “location” where factors o f production are combined in perfectly competitive markets. In this perspective, nation states are the main actors in the international economy and have the most important roles in policy- making as well as creating laws and regulations, and states have the absolute authority and sovereignty to control economic activities within their borders.

The new world economy, by contrast, is characterised by close interaction between FDI, trade, technology transfer, finance and skilled labour, in a multidimensional and complex set of interrelations. Trade has become part o f a package of international integrated activities through TNCs, which are the main actors

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in the new world economy. Therefore the strategies and structures o f the TNCs have been evolving. TNCs have followed global strategies and have adopted global structures (UNCTAD, 1993), so that now the borders o f national economies have become blurred. This indicates the interaction between globalisation and business firms’ strategies.

3.1.2 T N C s and N ew F orm s o f S ocio-E con om ic Integration

Over the past decades there has been growing integration of national economies fuelled by the rapid growth of international trade and investment that links national economies together11. International trade in goods and services grew faster than gross domestic product (GDP), and the growth of international investment was

1 9

even faster than the growth o f trade. Global foreign direct investment (FDI) in the period 1980-1988 rose 1.5 times faster than trade (UNCTAD, 1992); there are up to 39,000 parent firms, which invested in their 270,000 foreign affiliates, which reached US$ 2.7 trillion in 1995 (UNCTAD, 1996b: XIV). This is the result of the evolution of TNCs’ strategies and the modification of their organisational structures in response to the changing global economy, and particularly in response to imperfections in goods and factor markets (UNCTAD, 1993: 113; UNCTAD, 1996b: XIII). This has evolved from the simple functional and geographical links between parent firms and their foreign affiliates towards those involving broader and more complex forms of integration (UNCTAD, 1993: ch.V-VI). The most important feature of TNCs' strategies and organisational structure adaptation is the exploitation of the

International trade and investment has been carried on by transnational corporations through complex corporate strategies and an intricate network structure. TNCs engage in international production characterised by sophisticated intra-firm division o f labour for each corporate function. Therefore, trade and investment flows between countries channelled through TNCs are enormous and this has facilitated the integration o f national econom ies. (Michalet, 1994; UNCTAD, 1993).

I2. UNCTAD reported in the World Investment Report 1996 that “Investment flows in 1995 increased by 40%, to an unprecedented US$ 315 billion.... Foreign direct investment is a major force shaping globalisation. The outward FDI stock which the 39,000 parent firms invested in their 270,000 foreign affiliates reached US$ 2.7 trillion in 1995. Moreover, FDI flows doubled between 1980 and 1994

achieve economy of scale in production and distribution, and their ability to achieve co-ordination economies in many industries. TNCs networks established in various parts o f the world help reduce transaction costs due to both geographical and business proximity as well as internalised managerial structure, as they are set up the spider- webbed structure. Intra-firm transactions include distributing products, disseminating R&D, technology transfer and providing advanced market strategies, all could be made with decreased transaction costs. The existence of TNCs network in various host countries replaces market transactions by internal transactions to avoid imperfections in the markets for intermediate inputs. All firms’ activities, including marketing, research and development, and training o f labour, are interdependent and are related through flows o f intermediate products, mostly in form o f knowledge and expertise. The internalisation of transactions can bypass the market and keep the use of technology within the firm. This produces an incentive for the creation of intra-firm markets and thus reduces transaction costs. The growth o f internalised activity suggests the presence of substantial efficiency gains (Coase, 1988: 33-56).

The internalisation of business is of course not a new thing. It began during the latter part o f the 19th century (Wilkins, 1970), and accelerated greatly during the 1950s and the 1960s. Initially, the predominant TNCs originated from the US (Wilkins, 1974 and 1989), but during the 1970s this event slowed down due to the economic downtrend, including the two oil shocks and the widespread incidents of nationalistic reactions to multinational corporations. But during the 1980s, the globalisation of business again accelerated, with a surge of European and Japanese firms competing with US firms, and the United States became host to large numbers

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o f subsidiaries o f firms headquartered outside the United States (Bergsten and Graham, 1992: 15; Graham and Krugman, 1991).

What is new in the globalisation o f business is firstly the number of firms that i o

have created international operations and the number of nations that are home and host to such firms, and secondly, the more complex and wide scope o f their operations as well as the more integrated structural networks of these firms. The international business corporations are increasingly global in terms of the scope of their operations and the nature o f their concerns. However, business firms are still subject to national laws o f the host country where they located. The new form of socio-economic integration created by this kind of global corporation thus has the main feature of complex integration within its networks. In complex integration strategies, any value- added activities can be located in any part of TNC network systems, and integrated with other activities performed elsewhere, to produce goods for national, regional or global markets. The decision of where to locate an activity is based on its expected contribution to the overall performance of the corporate system as a whole. A firm’s organisation structure becomes correspondingly complex, involving multi-directional linkages and flows within the firm and also with unrelated firms. By this means, they achieve near-maximisation of global benefits and they can even find ways to circumvent or neutralise efforts and powers of national governments (Bergsten and Graham, 1992: 19). Integrated international production allows TNCs to reap the benefits o f economies of scale and scope from increased internal functional specialisation and international division of labour. The 1993 World Investment Report indicated that:

“TNCs in the largest home countries have internationalised their value-added activities and internalised the exchange o f goods and services to such a degree that

13. In 1990, the number o f firms that could meaningfully be called multinational was well over one