BusinessWorld | By Benjamin G. Defensor | February 23, 2004
One of the favorite lines of the anti-globalization sector is that multinationals have become so big and powerful that a) they are even bigger than some states and b) they have amassed enough political power to dictate policy to some small nations.
Two Belgian economists examined these two propositions in the second quarter issue of World Economics Magazine. They found that the Philippines is not one of these nations. In their listing of the top 100 economies for 2000, the Philippines was in the upper half at no. 42 with a GDP of $74.7 million, while Wal-Mart Stores, the biggest among the corporations, was no. 44 with value added of $67.7 billion.
Paul De Grauwe, professor of international economics at the University of Leuven, and Filip Camerman, an economist at the Belgian Senate, answers the question, "Are Multinationals really bigger than Nations?" in their World Economics article.
These question are grounded on two claims:
"... First, multinational corporations are very big. The most popular way to express this is that among the hundred biggest 'economies' in the world 51 are corporations and only 49 are countries, giving the impression that large corporations are now larger than the average nation-state..."
Second, "the size of multinationals is greater than ever. It is not difficult to find statistics that will support this claim. Indeed, measured in the dollar value of their sales and assets, multinational companies are bigger than ever."
De Grauwe and Camerman then proceed to measure the size of the big multinationals and compare them to nations. They then examined how the size of these multinationals evolved in relation to countries.
The first fallacy that the Belgian brings up is that while the sizes of the economies of countries are measured by their gross domestic product, the sizes of multinationals are measured by their sales. Sales and GDP are not comparable.
As any beginner in economics knows, only the original costs of the raw material of a product plus the value added in manufacturing is considered in its GDP value. Multinational sales, however, include several times the value of the raw materials of a product. For example, the GDP value of bibingka is the sum of the value of the malagkit palay, the cost of milling it into malagkit rice, and the cost of cooking it into bibingka.
The value of bibingka at the talipapa will include the cost of palay when the miller buys it, then the cost of the milled malagkit rice when the talipapa cook buys it, and finally when the school child buys the bibingka for merienda. Here the cost of the malagkit palay has been counted when it was sold to the miller, and then when the miller sold it to the talipapa cook and then when the talipapa cook sold it to the school child.
Thus as the two Belgian economists point out, "when comparing the size of corporations [using sales] with the size of nations [using GDP] we over estimate the relative size of corporations."
To eliminate the double counting, De Grauwe and Camerman computed the value added of corporations - "sales minus intermediate deliveries or the sum of the remuneration of labor and capital employed in the firm." Since these data are not readily available for all multinational corporations involved, they used five sample corporations that had this information available.
They were General Motors, Ford, DaimlerChrysler, Royal Dutch/Shell Group and British Petroleum and they found that the average value added of a multinational was about 25% of the value of sales. Using this adjusted figure, they tabulated the value added GNP of corporations and nations for 2002.
For the corporations they used Fortune magazine's Global 500 listing for 2000. For the nations, they used the World Bank report for the equivalent year. Using their adjusted figures, the top 100 economies have 63 countries and 37 corporations. And only two corporations made it to the top 50 - Wal-Mart Stores, no. 44, as mentioned above and Exxon, with value added of $52.6 billion.
And how did Asian countries fare? China was no. 6 behind the United States, Japan, Germany, United Kingdom and France, with a GDP of $1,076.9 billion. China was followed by India, no. 12, with $474.3 billion; Hong Kong, no. 23, $163.3 billion; Indonesia, no. 26, $153.3 billion; Thailand, no. 30, $121.9 billion; Singapore, no. 39, $92.3 billion; and Malaysia, no. 40, $89.7 billion.
However, De Grauwe and Camerman say that "this is not to say that some corporations are not big in relation to some small countries." Wall Mart, the biggest company measured by value added, is bigger than Pakistan, Peru and Algeria; Exxon is bigger than the Czech Republic, New Zealand, and many other small countries. But the impression gained from the anti-globular rhetoric is that corporations are now typically bigger than the typical country. And this is manifestly incorrect.
The Belgian economist also looked at the growth of the top 50 corporations compared to the growth of the world GDP from 1980 to 2000 and the found that the top 100 corporations did not match the performance of the world. Then they looked at a study made by UNCTAD (United Nations Commission on Trade and Development) on the growth rate of the top 100 companies compared to that of the world, and the result was that the corporations' average growth rate was slightly less than the world.
"The conclusion we draw from this is that there is little evidence that the big multinationals have become larger than countries during the last two decades."
And finally, the two economists tried to measure the power of the multinationals. Here they explain how they measured political power of the corporations: "The basic power mechanism can be described as follows: A successful corporation is one that drives out competitors because of a better and/or cheaper product. The ultimate success that a corporation can achieve is to sell a superior product that drives out all competitors. This successful corporation then achieves a monopoly position. This is not necessarily a problem if new companies can enter the market. The threat of such new entries can be sufficient to prevent the incumbent company from abusing its monopoly power. The incumbent, however, will have a strong temptation to abuse its monopoly position (and to make excess profits) by erecting barriers to entry. This cannot be done easily, except by bribing politicians who can erect legal barriers to entry. Thus, very successful corporations end up investing in political power, in order to maintain and solidify their hold on a particular market. Has the capacity of corporations to engage in such practices increased? Given the nature of the problem it will be difficult to give definitive answer.
"There is an indirect way to measure the evolution of the political and economic power of corporations. This is to analyze how quickly corporations come and go. In a world where the large corporations remain the same for long periods of time, it is likely that these corporations will be able to develop stronger political networks helping them to maintain better positions in the market. Conversely,when the companies at the top come and go quickly, their capacity to build up political power will be limited."
So they analyzed how quickly the composition of the top 10, top 20 and top 50 industrial corporations listed in Fortune magazine has changed. They found about half of these companies were able to maintain their position in the last 20 years. The other half has been replaced by newcomers. It shows "that a large proportion of those who were powerful in the past have lost some [or all] of their power, while others, who had little power, increased it quickly. All this suggests that corporate power is elusive and can quickly change." They also found that since 1994 service companies tend to disappear from top position at a faster rate than industrial companies.
In conclusion, Grauwe and Camerman found "no evidence that the size of multinationals relative to the size of nations has tended to increase during the last 20 years. Finally we argued that there is little evidence that the economic and political power of multinationals has increased in the last few decades."
"Multinationals have not grown in size relative to the nation-states nor have they become more powerful in the last 20 years. And yet the perception is very different. This leads to the conclusion that what has changed is not the economic reality. The big transformation has been in the perception of that reality. The big transformation has been in the perception of that reality. Many people now perceive multinationals as having grown in size and power, whereas they did not hold this view (or not to the same extent) 20 years ago. Why is it that perceptions can change so drastically while the underlying economic reality has changed so little?"
"... The popularity of ideas seems to evolve in a cyclical manner - very much like fashion. During the 1960s and 1970s anti-capitalist ideas were fashionable. They went out of fashion in the 1980s, but came back in full force during the second of the 1990s. Maybe all this is inevitable in a world where the human mind tires to grasp how 'the system' performs. Faced with great uncertainty about the functioning of the economy, people try one theory, then discard it to search for one that fit the data better, until the new theory is found wanting. The result of this groping for understanding is that ideas and perceptions are subject to large cyclical movements, even if the underlying reality changes little."BusinessWorld:
