Voice, exit . . . arbitrage: the politics of the modern multinational firm
| Published date | 01 December 2024 |
| DOI | http://doi.org/10.1177/13540661241270920 |
| Author | Ronen Palan |
| Date | 01 December 2024 |
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JR
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https://doi.org/10.1177/13540661241270920
European Journal of
International Relations
2024, Vol. 30(4) 894 –917
© The Author(s) 2024
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DOI: 10.1177/13540661241270920
journals.sagepub.com/home/ejt
Voice, exit . . . arbitrage:
the politics of the modern
multinational firm
Ronen Palan
City, University of London, UK
Abstract
Multinational corporations (MNCs) are often seen as singular organizations, with a
parent company controlling branches in other countries. But this is an abridged version
of decentred corporate groups structured as clusters of separate legal entities in several
jurisdictions held together by equity ties. The article argues that while the abridged
version of the MNC matches those aspects of those organizations that are of interest to
economists, it fails to capture the principal mechanism of interaction between business
and the institutional and political environment. I argue that the abridged version is a
barrier preventing political scientists from asking salient questions about the power of
MNCs and their shareholders. Specifically, while political scientists and international
political economists discuss the way these companies use their considerable financial
resources to voice their views on unwanted regulatory changes, to threaten exit or if
all else fails, to carry through with the threat, they ignore a third approach favoured by
corporate groups, setting up subsidiaries in third countries to arbitrage rules.
Keywords
Multinational corporation, power, arbitrage, sovereignty, political economy,
institutionalization
Introduction
In Seeing Like a State, James Scott (1998) wrote: ‘I began to realize, rather like abridged
maps . . . [political science and modern statecraft] did not successfully represent the
actual activity of the society they depicted . . . [T]hey represented only that slice of it that
Corresponding author:
Ronen Palan, City, University of London, Northampton Square, London EC1V 0HB, UK.
Email: ronen.palan.1@city.ac.uk
1270920EJT0010.1177/13540661241270920European Journal of International RelationsPalan
research-article2024
Original Article
Palan 895
interested the official observer’ (p. 3). In this article, I argue that just as Scott’s critique
calls for a more nuanced understanding of state representations of society, there is a need
for a more sophisticated analysis of multinational corporations that recognizes their legal
and operational complexities.
There seems to be broad agreement that over the past three or four decades, the
power pendulum has swung decidedly from the state towards the corporate sector
(Hathaway, 2020; Stopford et al., 1991; Waterhouse, 2013). Multinational corpora-
tions, in particular, are known for their ability to pay little or no tax (Garcia-Bernardo
et al., 2019; Zucman, 2015), avoid corporate liabilities with relative ease (Petrin and
Witting, 2023), and sidestep financial or reporting regulations. What is the source of
power of the multinational corporation? The purpose of this article is to demonstrate
that multinational corporations (MNCs) operate across three dimensions of power:
voice, exit and arbitrage. The third dimension, arbitrage, is often overlooked by politi-
cal scientists and international political economists because they persist in viewing
MNCs as singular, unified entities.
The multinational corporation is normally depicted as a singular organization that,
due to its sheer size and financial resources ‘play significant roles in shaping the global
economy’ (Kim and Milner, 2019: 4). But this is an abridged version of actual multina-
tional corporations. A corporation is a legal person licenced by a sovereign authority.
Strictly speaking, a corporation cannot be multinational. Most MNCs are not singular
organizations, but consist, in the words of Itzhak Hadari (1973) of ‘a cluster of separate
legal entities in several jurisdictions, which exist only if the laws of each jurisdiction
recognize them as legal entities’ (p. 754). This depiction, adds Rolfe Eicke (2009), is ‘not
consistent with the [abridged] business point of view, which regards a group of compa-
nies as one economic unity’ (p. 52).
Political scientists and international political economists have gathered evidence
showing that MNCs leverage their considerable financial and political power to influ-
ence government authorities through lobbying, campaign contributions, and other expen-
ditures in both home and host states (Hill et al., 2013; Kelleher et al., 2009). MNCs often
engage with regulators over extended periods, setting and influencing policy agendas at
both national and multilateral levels (Irogbe, 2013). When these efforts are insufficient,
corporations threaten or sometimes enact their version of the ultimate threat: exit
(Dörrenbächer and Geppert, 2011; Hill et al., 2013; Kelleher et al., 2009; Kim and
Milner, 2019; Nye, 1974).
Surprisingly – or perhaps not, considering the prevalence of the abridged version of
the MNC – political scientists and international political economists have tended to
ignore a third, arguably more potent, strategy: establish a subsidiary or an affiliate in a
different country to avoid or evade undesirable rules and regulations. The third strategy
is easier to execute, cheaper, and certainly a less politically fraught way of achieving the
same aim: escaping unwanted regulations and choosing the regulatory environment to
suit the interests of the group and its shareholders. The third option is made so much
easier, I argue, because modern MNCs are de-centred organizations.
The third option is known as jurisdictional arbitrage (Barzuza, 2011; Dine, 2014;
Kerber, 1999; Muchlinski, 2001). Jurisdictional arbitrage techniques exploit gaps, loop-
holes or omissions in the laws of one country to arbitrage the rules of another. By
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