MNCs and Surrogate Sovereignty
MNCs and Surrogate Sovereignty
John M. Kline
Director of the Master of Science in Foreign Service Program
Georgetown University
State sovereignty remains a fundamental tenet of international relations, even
as non-state actors challenge its traditional exercise. During the latter half of the
twentieth century, the rise of multinational corporations (MNCs) seemed to threaten
governmental prerogatives, especially in nations whose resources were dwarfed in size
and scope by MNCs. In the new millennium, the forces of globalization can magnify
such disparities, but the impact is more complex.
Continued MNC proliferation paradoxically diminishes the relative power of
individual enterprises and reduces their effective autonomy. By contrast, emergent civil
society groups utilize globalization to leverage MNC involvement in order to advance
issue-specific goals in diverse foreign locales. Case evidence illustrates how MNCs,
particularly in the natural resource sector, sometimes perform functions associated
with governance roles or responsibilities, generally where effective national government
influence is absent or acquiescent. Although these actions could constitute a type of
surrogate sovereignty, MNCs lack key attributes of traditional polities, including a clear
identity, territorial definition, and the legitimacy of local representative authority. Effective state sovereignty may have weakened under the impact of globalization forces,
but the MNC role in this process appears more responsive than causal.
Early Perception Versus Reality
The self-described sphere of modern international relations is premised upon the concept of interaction among sovereign nation-states whose governments constitute the
international system’s main actors. Traditionally, politically significant contact across
national boundaries was conducted by government officials or at least flowed through
Professor John M. Kline is Director of the Master of Science in Foreign Service Program at Georgetown
University’s Walsh School of Foreign Service. He is the author of numerous scholarly articles and four
books, including Ethics for International Business.
Copyright © 2006 by the Brown Journal of World Affairs
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authorized state channels. International organizations engaged in political activities
today are similarly intergovernmental in nature since they lack the authority to act
independently without the agreement of constituent states.
The emergence of private MNCs seemed to challenge this state-centric construct,
especially with concurrent growth in foreign direct investment (FDI) beginning in the
1960s. Although not without precedent, these new private enterprises differed in both
quantity and quality from their historical predecessors. Increasing numbers of parent
firms established subsidiary units in multiple countries across a broadening spectrum of
When the interests of home and economic sectors. The FDI mode of investment
injected foreign companies far more deeply into
h o s t n a t i o n s c o n f l i c t , host economies in comparison to the penetrawhose interests do MNCs serve? tion of either trade or portfolio investment,
giving MNCs a greater direct impact on domestic production, employment, and other
important socioeconomic indicators.
Significantly for international relations, through the proliferation of invested
subsidiaries, MNCs also acquired multiple simultaneous citizenships. Both legal incorporation and local operations linked MNCs to citizenship rights and responsibilities
in many nations. The relationship with and in these entitites and the impact of these
entities on national interests raised initial questions about the relationship between
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MNCs and national sovereignty. Particularly, when the interests of home and host
nations conflict, whose interests do MNCs serve?
The resultant debate has generated a flurry of activity in various fora. Many
academic writers examined these questions, but Raymond Vernon’s Sovereignty at Bay
gained broadest acceptance in describing this topic.1 Although the author’s analysis was
considerably more nuanced, it generally expressed that the rise of MNCs was perceived
as a challenge to nation-state sovereignty—private enterprises might serve as extensions
of foreign government power or, more uniquely, operate as independent, self-interested
new actors on the international relations stage. The potentially threatening aspects of
this development were portrayed in Global Reach2 and similar books, as well as explored
in studies such as the report of the Group of Eminent Persons3 operating under United
Nations auspices.
The notion that MNCs actually challenged national sovereignty proved too great a
stretch. Although a few anecdotal cases, such as ITT’s involvement in undermining the
socialist government of Salvador Allende in Chile, appeared to lend credence to such a
thesis, these ideas generally relied on indirect and merely implicit assertions. Simplistic
comparisons, such as those showing that an MNC’s annual sales might exceed the GDP
of a small country, ignore the fact that global sales figures are poor indicators of MNC
power within an individual nation. An MNC’s influence derives more from the firm’s
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MNCs and Surrogate Sovereignty
substantive connection to a particular nation’s economy in terms of local production,
employment, exports, or technology, and even these measures provide little protection
to MNCs when confronted by a determined sovereign government.
The primacy of national government sovereignty over MNC investors located
within the polity’s territorial boundaries was asserted during the acrimonious 1970s
when expropriations of foreign property, the ultimate demonstration of sovereign
political power over MNC holdings, peaked with nearly 60 such actions a year. Certainly, not all such expropriations can be viewed retrospectively as successful in terms
of the acting country’s long-term economic or even political best interest. Nevertheless,
sovereign host governments as diverse as Brazil, Zambia, Malaysia, Ethiopia, Peru, and
Indonesia all exercised their power to nationalize the assets of foreign MNCs when
deemed appropriate for the national interest.4
Although instances have occurred in which MNCs appeared to thwart state
opposition, such events typically involved overt or covert support from the political,
economic, or sometimes military influence of the MNC’s powerful home government.
These cases were sometimes argued to reflect MNC influence over home government
policies, especially when MNC headquarters were concentrated in the United States
and a few other Western industrialized nations whose international political objectives
appeared aligned with their MNCs’ business interests. Such overlapping interests,
however, would not challenge the basic reality that national governments, even when
acting in concert with MNCs, are still the fundamental political actors in international
relations.
The Changing Challenger
Several decades have elapsed since the formative years of the Sovereignty at Bay debate,
but the power of the concept’s perception lingers on despite the radically altered nature
of contemporary MNCs. Traditional multinational corporations have evolved into
transnational corporations (TNCs), with some enterprises moving toward a global
corporation concept. Behind these shifts in nomenclature lie substantive changes in
business interests, strategies, and operations. As MNCs become more diverse and diffuse, corporate national identities blur and operations are less restricted by the political
limitations of state boundaries.
Changes in the relationship between nation-states and MNCs are embedded in
broader systemic patterns described by concepts such as interdependence and globalization. A recent analysis of MNCs and sovereignty by Stephen Kobrin provides analytical
insight into the effect of these changes.5 He argues that nation-states exercise less control
under conditions of globalization, and MNCs can complicate the regulatory execution
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of a national government’s policy. Nevertheless, even with these significant changes,
MNCs still represent non-controlling vehicles or channels through which globalization forces flow rather than independent actors that could pose a direct challenge to
national government sovereignty or replace the state as a unitary, stable provider of
public goods.
Numbers and Diversity Provides Options
Statistical descriptions of contemporary MNCs paint an impressive portrait of (implicit)
power and influence in the global economy. Assessing the relevance of such influence
for the impact of MNCs on national political sovereignty requires translating macro
indicators into micro applications more directly relevant to nation-states. For example,
MNC growth in total numbers has been phenomenal. The United Nations estimated
that some 70,000 MNCs existed in 2004, controlling 690,000 affiliates.6 While impressive as an aggregate number, the political relevance of this growth lies more in its
disaggregated dimensions.
Early post-war dominance of U.S. MNCs was diluted by the emergence of similar
corporations from a reconstructed Western Europe and later Japan, joined more recently
by MNCs based in newly industrializing nations in Asia and Latin America. Now, as
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local corporations from Korea, Brazil, and most recently China establish more overseas
operations, host country bargaining power has increased.
From one viewpoint, MNC proliferation reflects general globalization trends
that appear to challenge national sovereignty by raising complicated policy concerns
At a disaggregated level, the in more countries. At a disaggregated level,
however, the growth and spread of MNCs can
growth and spread of MNCs also offer national governments, especially less
can offer national governments powerful ones, more options in pursuing their
national interest objectives. With MNCs now
more options in pursuing their comprising an increasingly broad category of
national interest objectives. disparate entities, diversity means more choice
for the exercise of national government sovereignty.
For example, while oil companies are among the largest and most financially
powerful MNCs, single firms, even when allied with their home governments, cannot
successfully challenge another government’s sovereign power when alternative MNC
investors are increasingly available. The U.S. government banned its MNCs from investing in Sudan, but other oil MNCs proved willing and able to develop the country’s
resources. When external pressures helped convince Canada’s Talisman to divest from
Sudan, oil firms from Malaysia, India, and China were ready buyers, while French and
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Swedish firms pursued new exploration sites.7
Similar considerations apply in Iran and Burma. Whether the entity seeking to
challenge a national government is the MNC itself or the firm’s home government,
the proliferation of capable MNCs as alternative investors decreases the potential for a
successful challenge to host government sovereignty. (It could be argued that this trend
undermines national government sovereignty by decreasing a home government’s control
over its own MNCs, but this application would deal with the potential extraterritorial extension of national power rather than the exercise of a government’s sovereignty
within its own political borders).
Kaleidoscopic MNC Identities
As their overall numbers increased, MNCs also began strategic transformations that
reduced their potential to either directly challenge a national government or constitute
an alternative polity. Many large MNCs decentralized management controls, blended
corporate identities, and generally reduced their long-term stability as unitary enterprises. These adjustments increased the ability of MNCs to respond flexibly to the
speed and magnitude of global economic change; however, the changes also made it
harder to assign individual MNCs the attributes of a distinct political actor over any
reasonable period of time.
The emergence of MNC strategies based on deeper global integration, often associated with John Dunning, traces changes in MNC organizations.8 Patterns evolve
from multi-domestic structures, where parent-to-subsidiary flows dominate, to simple
integration among affiliates, to complex integration with multi-directional specialization
throughout a global value chain. Operationally decentralized and globally dispersed
activities constrain the effective control of a central MNC headquarters and limit MNC
territorial ties and commitments to any individual nation-state.
Related transformations in MNC character arise from the expanding use of mergers and acquisitions and international strategic alliances to achieve quick and adaptable
MNC growth. Industries themselves (for example, leading computer and telecommunications companies) must evolve to combine capabilities or risk being left behind
in the development of an integrated office automation sector. Traditional associations
between corporate names and nationality become confused when a Brazilian-born
executive of Renault leads Nissan to a successful recovery from near bankruptcy, IBM
personal computers become products of China-based Lenovo, and British Petroleum
adopts a non-national BP symbol before moving to a mission-based Beyond Petroleum
designation.
The increasingly kaleidoscopic changes in MNC composition and character
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alter their potential to challenge national government sovereignty. Corporate national
identities blur as MNCs locate the majority of their assets, employees, and sales outside
their traditional home country and pursue strategic alliances that derive maximum
advantage by linking MNCs based in different world regions. As enterprises adjust
lines of business, shift organizational structures, redesign corporate strategies, and
respond to internationalized shareholdings, MNCs increasingly lack enough stability
in identity and purpose to challenge national governments, much less provide the basis
for an alternative polity.
If transformations leave MNCs less capable of challenging national sovereignty,
why would the perception of a threat persist, or even increase, in contemporary discourse? A review of cases where MNC political involvements have captured public
attention presents two responses to this question. One answer lies with the role of
civil society groups that highlight alleged abuses of MNC power but also seek to use
MNCs as levers to influence foreign government policies. A second, sometimes related
explanation arises from instances where private MNCs become involved in efforts to
provide traditional public service functions, implicitly assuming the role of a surrogate
sovereign in communities lacking an effective government presence. Both elements can
be briefly illustrated by focusing on the natural resource sector, where striking disparities
in apparent power might permit MNCs to challenge sovereign governments, especially
in small developing countries.
MNCs as Levers
The prominent rise of organized civil society groups plays an important role in refocusing attention on MNC influence, particularly in areas related to human rights, labor
relations, and the environment. At times, the discussion reflects traditional concern that
MNCs might thwart local government objectives, imposing their own self-interested
priorities on the host country. Other claims suggest that MNCs collude with host
governments, reinforcing “wrong” policies that are adverse to the local population’s
best interests. In these circumstances, MNCs are often urged to terminate their local activities, adopt different operational standards, or actively seek changes in host
government policies or in the government itself. In such cases, target MNCs are seen
to support host government decisions while, paradoxically, civil society groups call for
the MNCs to challenge the sovereign government’s policies.
History abounds with examples of MNCs serving as instruments in their home
government’s foreign policy. Similar use of MNCs as levers by civil society can be
traced from the anti-apartheid campaign against South Africa. MNCs proved more
responsive than many governments in bringing pressure to bear on the South African
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regime, spawning attempts to replicate similar challenges to other objectionable governments.9 Employing techniques ranging from shareholder resolutions and public “naming and shaming” tactics to organized MNCs proved more responsive than many
divestment campaigns and consumer
governments in bringing pressure to bear
boycotts, advocacy groups seek to alter
foreign government policies and actions on the South African apartheid regime.
harnessing MNC influence. The MNC serves as an economic lever conveniently accessible in Western developed countries that, when pulled, can shape business decisions
that exert economic impacts within other sovereign countries.
Several recent examples of this approach are analyzed by Marina Ottaway in her
Foreign Policy article “Reluctant Missionaries.”10 Reviewing cases of natural resource
MNCs invested in countries such as Sudan, Angola, Nigeria, and Chad, she questions
both the appropriateness and effectiveness of encouraging such political roles for MNCs.
The central controversy is not whether host government policies should be changed,
but whether MNCs should act as principal agents of such change in sovereign foreign
countries, by their own initiative or at the behest of other groups.11
The cases examined in the Ottaway piece illustrate some reasons why MNC
challenges to government sovereignty will generally fail, even in extreme cases where
large natural resource MNCs appear to hold clearly disproportionate power relative
to small, poor developing countries. Host governments can still expropriate offending
foreign investors, even though such actions may trigger international financial sanctions
and scare away other potential investors. Bolivia’s recent seizure of MNC natural gas
holdings demonstrates that such policies remain an option for small host countries.
This case provides a current test of sovereign national power and the effect of MNC
competition for access to natural resources.12 Host country bargaining power should
increase if governments can find alternative and perhaps more malleable foreign investors from among the expanded ranks of diverse MNCs.
Chad offers an unusual example of a concerted effort to limit a sovereign host
government’s ability to extract revenue from its own resources.13 ExxonMobil collaborated with the World Bank and groups of civil society advocates to insist that Chad’s
government commit itself to policies favoring specific social development priorities.
Most revenue resulting from oil exports are to be held in escrow outside Chad to be
dispersed only for projects approved by a committee including civil society representatives. Although its objectives are laudable and Chad passed conforming legislation,
this scheme essentially challenged and successfully limited the Chadian government’s
sovereign authority over the disposition of benefits from the country’s natural resource
wealth.
Even with this unusual tripartite coalition challenging its sovereignty, Chad’s
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government sought to alter the accord’s constraints after initial production began. Faced
with increased activity by armed opponents, the government threatened to stop the
project’s oil flow while contemplating potential new MNC investors for other reserve
sites where spending restrictions would not apply.14 If the international community
The MNC serves as an economic lever con- or at least a unified oil industry
insists on the original spending
veniently accessible in Western developed terms and resists the lure of new
countries that, when pulled, can shape resource reserves, Chad’s sovereignty might remain effectively
business decisions that exert economic compromised. But the record of
impacts within other sovereign countries. challenges to government actions
in Sudan, Burma, and other such cases illustrates how national governments can use
dispersed MNC growth to their own advantage.
MNCs as Surrogates
130
Another type of MNC involvement with host country sovereignty arises when MNC
affiliates provide a range of public services in local communities, again primarily in
poorer developing countries. Such MNCs appear to operate as a type of surrogate
sovereign by taking over traditional government functions. These involvements often
reflect corporate “good citizenship” efforts that provide financing and/or technical assistance for projects such as the construction of local schools, health clinics, new roads,
or improved water systems. Corporate philanthropy can sponsor various activities in
many countries without encountering sovereignty issues. However, the provision of
basic services to local communities in developing countries can raise issues regarding
the national government’s basic capacities, and thrust MNCs into broader governance
roles than might be expected or desired.
Descriptions of “factory towns” during U.S. industrialization or MNC banana
plantations in Central America evoke the image of communities where a single large
employer may dominate the local economy and thereby the community’s social and
political life as well. Historical accounts suggest that many corporations sought such
influence as a way to protect and advance their interests. However, few contemporary
MNCs view such efforts as cost-effective or desirable. Similar circumstances arise now
mainly in large natural resource projects in isolated regions of developing countries where
the provision of infrastructure, housing, and basic social services is needed to sustain the
project’s workforce. Host governments may lack the resources to provide such services
or may just consider such efforts a corollary benefit of the foreign investment.
But project histories reveal how MNCs become engaged in providing public
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MNCs and Surrogate Sovereignty
services, even when firms would prefer to avoid such entanglements. To demonstrate
tangible local benefits from a Chevron oil project in an isolated region of Papua New
Guinea, the company expended millions of dollars on clinics, community centers, classrooms, and water tanks. Chevron also built a 66 mile, $40 million mountain highway
irrelevant to the project, in response to demands from local tribes to provide improved
access to other areas. Once built, however, the highway provided two-way access that
also brought liquor, theft, poaching, and squatting to tribal communities, sparking
demands that Chevron somehow also police traffic on the highway.15 MNC mining
ventures in other regions of the country found themselves in similar local governance
situations when called upon to provide social services, manage disputes among local
tribesmen, and improve relations with the distant national government.16
Sometimes MNC activities face external criticism that foreign investors provide
insufficient benefits for local communities. In response to charges of complicity in labor
abuses and forced displacements associated with construction of a natural gas pipeline
in Burma, Unocal promoted its contributions to schools, health clinics, and small
business ventures in 13 villages MNCs appear to operate as a type of
located along the pipeline’s route.17
Corporate statistics document surrogate sovereign by taking over
improvements in village education traditional government functions.
and health, but how long would or should an MNC provide such basic social services?
Even where MNCs provide needed local infrastructure or basic services, such acts of
surrogate sovereignty do not constitute the long-term commitment to a local population
that is a defining attribute of a polity. Pipeline construction ends, and oil or mineral
reserves become exhausted at some point, leaving most firms ready to move on.
Shell’s operations in Nigeria illustrate additional elements of the surrogate sovereignty challenge. The company engages broadly in local community projects focused
on improving social infrastructure, spending over $55 million in 150 communities in
2000.18 However, the country’s main oil-producing areas have suffered neglect from a
national government that returned little oil revenue to the impoverished regions from
which the oil was extracted. Both local militants and civil society critics called upon
Shell to provide local communities with a larger share of the benefits, either through
direct corporate contributions or through pressuring the national government to allocate more revenue to the regions.
If the company pressured the government to alter its allocation of public revenue,
such action would constitute MNC political interference and a challenge to national
sovereignty. Yet increasing the company’s own contribution to local community improvements positions the MNC to act as a surrogate sovereign in areas where the
government is largely absent. As one Shell executive remarked, “We build schools, put
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in water systems and electricity. But we also pay our taxes. It is really the state’s job to
take care of its people.”19
Conclusion
132
Despite impressive growth in financial, technological, and other resource capabilities,
MNCs do not function effectively as independent, unitary actors that can challenge
nation-state sovereignty. MNCs constitute significant players on the international stage,
but they are more likely to be used by governments or civil society groups seeking to
influence foreign government policies than to initiate or direct such efforts themselves.
Where MNCs appear closest to assuming basic governance functions, the national
government is generally absent, acquiescent, or may even encourage MNC efforts to
provide social services. MNCs generally prefer to avoid the role of surrogate sovereign,
undertaking it only when essential to sustain local operations or in response to external
pressures when host governments fail.
Evolving MNC characteristics in a globalizing economy do not suggest much
potential for these actors to constitute effective polities in the international system.
Corporations increasingly forego the type of permanent attachments to geographic
boundaries that define and sustain political entities. Connections and commitments to
distinctive populations are difficult to maintain with growing international shareholdings
and the global dispersion of the workforce. These forces themselves are fluidly redefined
through shifting subcontracting and corporate alliance arrangements. MNCs may
perform activities associated with political duties or functions without being organized
or recognized as a polity. Certainly, the global community gives no sign of providing
legitimizing assent to any formal MNC political authority. W
A
Notes
1. Raymond Vernon, Sovereignty at Bay (New York: Basic Books, 1971).
2. Richard Barnet and Ronald Muller, Global Reach (New York: Simon & Schuster, 1974).
3. United Nations Department of Economic and Social Affairs, The Impact of Multinational Corporations
on Development and on International Relations (New York: United Nations, 1974).
4. Kenneth Rodman, Sanctity vs. Sovereignty (New York: Columbia University Press, 1988).
5. Stephen Kobrin, “Sovereignty at Bay: Globalization, Multinational Enterprise, and the International
Political System” in The Oxford Handbook of International Business, ed. Alan Rugman and Thomas Brewer
(New York: Oxford University Press, 2001), 181–205.
6. United Nations Conference on Trade and Development, World Investment Report 2005 (New York:
United Nations, 2005), 4.
7. See Karl Vick, “Oil Money is Fueling Sudan’s War,” Washington Post, 11 June 2001; and Peter Goodman, “China Invests Heavily in Sudan’s Oil Industry,” Washington Post, 23 December 2004.
8. United Nations Conference on Trade and Development, World Investment Report 1994 (New York:
United Nations, 1994), 117–160. See also John Dunning, The Globalization of Business (New York:
the brown journal of world affairs
MNCs and Surrogate Sovereignty
Routledge, 1993).
9. John Kline, “Political Activities by Transnational Corporations,” Transnational Corporations 12, no.
1 (April 2003): 1–25.
10. Marina Ottaway, “Reluctant Missionaries,” Foreign Policy 125 (July–August 2001), 44–54.
11. This distinction is important from a normative standpoint. MNCs can provide channels to bring
pressure against repressive governments or to improve a host country’s labor or environmental practices,
for example. This analysis does not assess whether objectives are desirable; the focus is on whether MNCs
should be considered actors or instruments in such cases.
12. See Hal Weitzman, “Bolivia Set to Seize its Foreign-run Gas Fields,” Financial Times, 2 May 2006;
and Steven Mufson, “Bolivian Gas Takeover Sets a Familiar Scene,” Washington Post, 4 May 2006.
13. Jerry Useem, “Exxon’s African Adventure,” Fortune, 15 April 2002, 102–114.
14. See David White, “The ‘Resource Curse’ Anew: Why a Grand World Bank Oil Project Has Fast
Run into the Sand,” Financial Times, 23 January 2006; and Chip Cummins, “Exxon Oil-Fund Model
Unravels in Chad,” Wall Street Journal, 28 February 2006.
15. Charles McCoy, “Chevron Tries to Show It Can Protect Jungle While Pumping Oil,” Wall Street
Journal, 9 June 1992.
16. For example see S. Karene Witcher, “Australia Mining Firm Meets Its Match As Tribesmen Invade
Papua Gold Find,” Wall Street Journal, 29 December 1988; and Keith Richburg, “Mining Company Fills
a Hole,” Washington Post, 30 November 1998.
17. Human Rights and Unocal: A Discussion Paper (El Segundo, CA: Unocal, undated), 6–9.
18. John Kline, Ethics for International Business (London: Routledge, 2005), 71.
19. Ibid.
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