Third World Quarterly, Vol. 28, No.

6, 2007, pp 1167 1183

The Firm Rules: multinational corporations, policy space and neoliberalism

engendered by globalisation. It evaluates the three major competing hypotheses on the decline in the states inability to bargain with multinational corporations for the purpose of promoting economic development in light of two case studies of state rm bargaining. The case studies are drawn from the mining sectors in Argentina and Chile in the late 1990s.

The relationship between the state and multinational corporations (MNCs), and its implications for economic development have been fundamental issues in the literature on globalisation and its consequences since at least Raymond Vernons 1971 classic, Sovereignty at Bay. The early literature on this subject, including Vernons own, tended to view state rm bargaining as the consequence of the inevitable conict between the national interest of the host country and the global interests of the multinational enterprise. Through bargaining the state attempted to channel private investment to serve its own developmental objectives. It was also argued that the bargain obsolesced over time to the benet of the state, which was able to make increasing demands on the investor once the investment was in place.1 Thus, in state rm bargaining, the state was generally viewed as the stronger party over time. But with the advent of globalisation and the transition from the importsubstitution to the neoliberal economic model, the international political economy literature increasingly evoked the powerlessness of the state vis-a`-vis market forces, and particularly its retreat from an interventionist role.2 As the consequences of the economic reforms of the 1980s became more evident, there emerged signicant agreement that, rather than the state being unambiguously shrunk or withering away, the result of neoliberalism, and in particular of privatisation programmes, was a redenition or even re-forming of the state in which its role weakened in certain areas and was reinforced in others.3
Paul Alexander Haslam is in the School of Public and International Aairs, University of Ottawa, Rm 421 (c/o 6th oor) Pavillon Vanier, Ottawa, Ontario K1N 6N5, Canada. Email: [email protected]. ISSN 0143-6597 print/ISSN 1360-2241 online/07/06116717 2007 Third World Quarterly DOI: 10.1080/01436590701507594

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It also became apparent that states had lost the upper hand in their negotiations with rms, and that investment bargains no longer obsolesced in their favour. A series of studies conducted in the 1980s showed that MNCs had become particularly innovative in avoiding attempts to renegotiate the original investment bargain and disposed of a wide range of strategies to frustrate government restrictions.4 The empirical evidence from the 1990s further undermined the claims of the bargaining model, as the decade was characterised by a remarkable lack of state MNC bargaining and the further liberalisation of foreign investment rules.5 The United Nations World Investment Report conrmed these observations in its overview of trends in foreign direct investment (FDI) legislation: of the 1035 regulatory changes to national legislation governing FDI recorded between 1991 and 1999 only 5.9% were in the direction of greater restrictions on foreign investment.6 The question to be asked, therefore, is what explains the decline in the states ability to bargain with foreign multinationals for the purpose of promoting economic development? Indeed, this is a question which goes to the heart of the constraints on state policy autonomy engendered by globalisation. Although the question seems simple enough, in fact there are various competing explanations, both within the bargaining and international political economy literatures. The purpose of this article is to contribute to that debate by evaluating the major competing hypotheses regarding the powerlessness of the state in light of two specic cases of state rm bargaining in Argentina and Chile. In this respect, the study is probably best characterised as an explanatory case study.7 That is to say that its purpose is not causal inference in the strict sense advocated by King, Keohane and Verba, but rather descriptive richness in order to evaluate competing explanations of the states restricted policy space.8 Explanations for the decline in state rm bargaining The powerlessness of the state has been addressed in the literature through three major currents, which in terms of their approach to state rm bargaining in the context of globalisation, assert: the irrelevance of bargaining; the displacement of bargaining; and the maximisation of bargaining power. Many theorists assert that bargaining no longer denes the MNC host country relationship, and that the (relative) irrelevance of bargaining is reected in a shift from a conictive relationship to a more co-operative one.9 Governments and rms are viewed as increasingly interdependent in realising wealth and competitiveness in the global marketplace.10 Recent research has also demonstrated that reducing the restrictions on MNCs can help better integrate subsidiaries into the global competitive strategy of their parent companies. When this occurs, local subsidiaries are more likely to employ the latest technology and managerial techniqueswhich have greater developmental spill-over eects on the local economy.11 The central argument of this approach is that government strategies have changed since the era of mass expropriations in the 1970s. Edward Safarian writes: The key to the new [liberal] approach to TNCs [MNCs] is that policy on 1168

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and policy on endogenous growth have converged. TNCs are regarded as central to the creation and diusion of knowledge, within and between rms, and in cooperation with Governments.12 This is also, implicitly, an argument about the dominant kinds of foreign investment. It implies, following John Dunnings classication, that rms have shifted from resource and domesticmarket-seeking strategiescontentious with nationalists everywhereto eciency (or strategic-asset-seeking) strategies, at the same time that countries have rejected the import-substitution model in favour of a more liberal and export-oriented approach.13 In this respect the state becomes a market player or competition state, where its principal role is to facilitate business success by providing key legal, knowledge and physical infrastructure, but not through direct intervention in the economy.14 Second, the apparent absence of state rm bargaining in the 1990s may be a result of the displacement of bargaining to other arenas. Ravi Ramamurti argues for a two-tier model that takes account of the bargaining which occurs between states in the bilateral and multilateral arena. He suggests that state state bargaining shapes international investment regimes in such a way that it limits the range of state rm bargaining options. In this conceptualisation strong states (in the international system) enhance the bargaining power of their rms everywhere.15 It is certainly true that the USA has promoted its vision of investment protection and protected US investors through such agreements.16 Thus, the increasing density of international investment agreements to which countries are party suggests that their hands may be increasingly tied when it comes to bargaining with MNCs. UNCTAD gures suggest that the universe of international investment treaties numbers at least 2181 bilateral investment agreements, 146 other adopted international investment agreements, with at least another 36 under negotiation.17 Such agreements codify demanding minimum standards for investment protection and often include investor-state dispute settlement provisions which permit foreign rms to sue governments for actions which may be considered tantamount to expropriation and which have been interpreted by some dispute settlement tribunals to include regulatory actions by governments.18 Although it is generally agreed that the primary function of a bilateral investment treaty is as a commitment device that indicates a change in policy towards a more liberal domestic economic environment, concerns persist in the contemporary literature that such agreements seriously reduce the policy space and exibility required by developing countries.19 A rise in the number of cases before international dispute settlement panels since the Argentine crisis of 2001 (Argentina alone faced 42 cases at the end of 2006), and panel rulings awarding millions of dollars to MNC plaintis, have done little to belay these fears. The third approach explains the failure of bargains to obsolesce through the dominant bargaining power of the MNC. In this scenario, either the MNC enjoys greater power resources than the state, or there are constraints that limit the states ability to act, or both. In mining and other extractive industries, for example, MNCs have reduced the likelihood of obsolescence through project nancing their investments and using prominent victims such as international
FDI

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banks or multilateral institutions as nancial contributors or guarantors. In such cases expropriation of property, or renegotiation of contracts, would be a crime not only against the particular rm involved, but also against heavyhitting backers such as the World Banks International Finance Corporation (IFC).20 The use of cross-fault provisions in project nancing mean that a hostcountry default on an IFC loan or guarantee could put other World Bank disbursements at risk, as well as causing a loss of reputation in other institutions which share directors with the IFC.21 Interestingly much of the international political economy literature, particularly in the neo-Marxist tradition, accords with this position, arguing that the state is increasingly hostage to mobile international capital in the era of globalisation.22 A tale of two conicts As indicated above, the purpose of this article is to evaluate three competing hypotheses explaining the powerlessness of the state in light of two specic cases of state rm bargaining in Argentina and Chile, two emerging economies with, at that time, hot prospects and high expectations of future foreign investment inows in the mining sector. The mining sector, a longstanding nationalist lightning rod with enormous sunk costs has, since the early work of Theodore Moran, been considered the paradigmatic example of the obsolescing bargain. As the sector in which, according to theory, the pressures to bargain and tensions between the state and MNCs are most likely to continue to exist, it is an ideal empirical case of why state rm bargaining is constrained, and which of the three hypotheses has the greatest explanatory relevance. Two failed attempts to challenge the existing division of economic rent between the state and multinational mining companies have been selected as case studiesalthough it is worth noting that not only were these failed attempts, but they were the only signicant bargaining attempts in these countries during the 1990s. They also represent new case studies, the result of eld research and extensive interviews, about which no analyses have yet been published. The two cases are the 1997 98 Villarzu tax reform proposal in Chile; and the 1997 2000 royalty dispute between Minera Alumbrera and the provincial government of Catamarca in Argentina. Minera Alumbrera royalty dispute Mining has not, historically speaking, been an important industry in Argentina, despite sharing the same Andean geology as Chile. The high risk, massive investments, and long time periods before protability, made mining relatively unattractive in comparison to agriculture and manufacturing. Beyond quarrying and the extraction of decorative rocks, mineral mining was conducted by a handful of private enterprises extracting iron ore, gold, lead and zinc. Foreign private enterprise was virtually absent, and much of the exploration and exploitation was conducted by state-owned enterprises run by the military conglomerate, the General Direction for Military Production (DGFM). The lacklustre development of private mining was also 1170

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limited by the extremely high royalty payments demanded by provincial governments, which held the constitutional ownership of subsoil resources. This meant that, despite the discovery of several high-grade deposits such as the Bajo de la Alumbrera site in 1949, neither private enterprise nor the state was able to develop these resources. In the early 1990s Argentina abandoned the state-led development model. In mining, this translated into a triad of legislative reforms passed in 1993, which sought to open the sector to foreign investors and limit the royalties charged by provincial authorities to 3%. At the time of its US$1.2 billion investment, the Minera Alumbrera mining project at the Bajo la Alumbrera site was the largest single mining investment in Argentine history. Many considered it to be the test case for mining in Argentina. It was a test, above all, of whether the revision of Argentinas mining legislation in 1993 had really changed the investment conditions and attitudes of provincial governments in such a way as to make the country an attractive destination for foreign mining investors. Enrique Loncan, President of Barrick Explorations expressed it as follows:
Bajo la Alumbrera is the rst megaproject established under the new mining legislation, and as a result puts to the test the consistency of the legal and scal framework that will determine its feasibility. As a consequence, the international community considers this investment to be a reference point.23

However, the Bajo de la Alumbrera project became a reference point for the rst major round of state rm bargaining in Argentine mining. In this case the government of the province of Catamarca under Governor Arnoldo Castillo, where the mine was located, sought to increase the value of royalties paid by the foreign company. Shortly after Minera Alumbrera had sunk half of its $1.2 billion dollar investment, the government of Catamarca announced that it would be using a dierent formula to calculate the 3% royalty on the mine-head value of the production than that used by the rm. Unlike the rms denition of mine-head value, which included a deduction of all costs incurred between the extraction of the mineral and the rst stage at which it was priced, Catamarca would not allow any deductions. This added signicantly to the value of the royalty. Firm executives calculated that it eectively doubled to 6%, or an extra $8 9 million per year.24 However, the government of Catamarca found itself opposed by both Minera Alumbrera and the national executive.25 From the viewpoint of the nation, Catamarcas royalty stance undermined the rule of law, and put in jeopardy the entire structure of stable rules which was to make possible the development of Argentinas mining potential. It was an attitude emphasised by the president of Minera Alumbrera:
The uncertainty that exists as a result of the current situation, presents other entry barriers to those who wish to invest, not only in Catamarca, but also in Argentina . . . If the consensus falls apart at the rst opportunity, independent of who is correct and who is mistaken, the victim is the condence of those who contribute the capital and nancing.26

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The dispute had emerged out of the federal division of powers, which allowed the federal government to dene national mining policy and legislation, but which gave the provinces the right to apply and enforce it. In May 1993, as part of its renovation of the national mining legislation, the federal government had passed the Mining Investment Law 24,196, which limited the royalties that could be charged by the provinces to 3% of the mine-head value. The Federal Mining Accord Law 24,228 then secured provincial agreement for these changes. Since Argentine legislation is made eective through its later regulation, it was assumed that mine-head value would be dened in more detail when the law was regulated. Mining executives claimed that the term was widely recognised in international mining circles, as meaning the value of the mineral at its rst stage of commercialisation (rst stage at which a price can be attributed to it) minus the costs incurred between its extraction and that stage, including amortisation. Catamarca adhered to the federal legislation regarding royalties on 17 November 1993, but not before passing its own law on royalties in October. The Catamarcan law accepted the 3% royalty, but failed to dene the calculation of mine-head valuethus leaving space for its own interpretation of the formula. On 28 December 1993 the federal government issued Decree 2686 which regulated the Mining Investment Law, and dened mine-head value as the price of the mineral at the rst stage of commercialisation with the deduction of costs incurred between extraction and sale. However, Catamarcas regulation of its own royalty law did not accord with the federal denition, and neglected to add the deductions to the calculation of minehead value. According to the Catamarcan authorities, the fact that its royalty law predated its adherence to the federal law, and that it had the constitutional right to regulate its own laws, meant that its own interpretation of the mine-head value took precedence.27 Since Catamarca had accepted the federal denition in its 1994 contract with another foreign company operating in the province, FMC Lithium, however, its stance seemed particularly opportunistic.28 Nonetheless, Catamarca was following a traditional bargaining strategy. Once the investment was sunk, it changed the rules of the game to extract more rent from the rm. From the provinces point of view, the rm would have little choice but to pay the relatively paltry surcharge demanded by the province. Interviews with the Mining Secretariat in Catamarca revealed that the provincial government made the move because it thought its bargaining power was strong, and it could get away with it. Catamarca was the province with the hottest prospects for new mining development, with dozens of foreign junior exploration companies operating in the region, and many deposits already identied and owned by the province. The province viewed the payment of royalties as legitimate compensation for the extraction of a non-renewable resource. In addition, it believed there was extra surplus to be gained at the Bajo de la Alumbrera site which, unlike many other sites in the province, had a high mineral grade and relatively easy conditions of access (low altitude), and was therefore assumed to be highly protable. At the core of the argument was the assumption that there were protable opportunities 1172

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in the province, and a little extra bargaining by the province would not change those fundamentals.29 There were also political calculations behind the conict. Catamarca had one of the highest unemployment rates among all the Argentine provinces, and by the start of operations in mid-1997 the development at the Alumbrera site had already frustrated high local expectations regarding its economic impact on the surrounding region. Facing gubernatorial elections in March 1999, the governing party (a provincial variant of the Radical Party, the opposition at the federal level, the Union Frente Cvico) found it useful to portray Minera Alumbrera, the federal government and the Peronist party then governing at the federal level, as deliberately preventing Catamarcans from cashing in on their birthright. The federal executive, Minera Alumbrera, and the government of Catamarca entered into negotiations to resolve the issue. All parties rejected taking the issue to the Supreme Court, although it clearly fell within the Courts competence. The rm thought a political solution would oer more enduring stability, while the province recognised that a lengthy court battle would delay its ability to collect its royalty paymentsif it could win in a court dominated by appointees loyal to the president. The national executive, on the other hand, feared the damage to Argentinas international reputation that the publicity surrounding a court case might cause.30 Negotiations took place through the Federal Mining Council, at which all the provinces were represented, and the Bicameral Commission on Mining (of the National Congress). The Commission consulted with the private sector, the Council, and the province of Catamarca. As a result of these consultations, it proposed a denition of mine-head value which was to allow all deductions except amortisation.31 The new deal was to cost Minera Alumbrera 25% 30% more than the original royalty law.32 In addition, a Compensation Fund for Development was to be established. Paid for by federal monies, the fund was intended to compensate the province for the income lost from adopting the new (federal) denition of mine-head value. The changes required modications to the original Mining Investment Law, which had to be passed by both houses of Congress, and the provincial governments. The project law was passed by the Senate in June 1998, but without the support of the Catamarcan representative.33 The nal version of this law, sanctioned in November 1999, also failed to get the necessary provincial approval.34 Interestingly, the solution to the royalty issue was not pursued through state rm bargaining, but rather via intergovernmental bargaining, in which the federal government of Argentina took the side of a foreign rm against a recalcitrant provincial government. The fundamental argument which motivated the federal government to move decisively against the actions taken by the province of Catamarca was the fear that changing the rules of the game would negatively aect foreign investment ows in the mining sector and elsewhere. This was conrmed by the eorts made by the political authorities (both federal and provincialother than Catamarca) to underline 1173

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their commitment to the rules of the game, and to condemn Catamarca for breaking them. The Villarzu tax reform proposal Mining has been the dominant industry in Chile for well over a century. The nitrate industry reached its nadir in the 1930s at which point it was largely replaced by copper extraction. Copper, unlike nitrates, where nationally owned rms had coexisted with foreign ones, was capital intensive and dominated from the very beginning by two large US rms: Kennecott and Anaconda. Beginning in the early 1950s governments of various political stripes in Chile pressured the rms in order to extract more surplus from them, a process which culminated in the nationalisation of large-scale mining under the government of Salvador Allende in 1971. The dictatorship of Augusto Pinochet, which overthrew Allende in 1973, reorganised the nationalised companies as the Chilean Copper Corporation (Codelco) in 1976, but principally sought to encourage private investment in mining during its tenure through generous legal and nancial concessions. The most important of these were the accelerated depreciation of mining assets (permitting investment to be claimed against prots), the absence of royalty payments, and the constitutional guarantee of private property (full compensation for expropriation) established by the Organic Mining Law of 1982. The approach of the Pinochet government was broadly viewed as a failure, as no major investment in new mines occurred until the 1988 investment by the Australian rm Escondida. This investment was a watershed and, by the early 1990s, under the new democratic Concertacion government, Chile was experiencing an unparalleled mining boom. The legal framework which governed this new investment, however, was that established by the dictatorship: the 1974 Foreign Investment Statute and the Organic Mining Law. In late 1997 there were some indications that the ruling Concertacion coalition government intended to renegotiate the terms of its investment bargain with foreign rms in the mining sector. The initiative originated with a respected member of the government. In October 1997 former president of the state-owned copper company, Codelco, and then Secretary to the President (the second ranked position in the government), Juan Villarzu proposed that a special tax be levied on the exploitation of non-renewable resources in Chile.35 This initiative, known as the Villarzu proposal, was a response to a popularly held view that the foreign mining companies operating in the country were not paying sucient tax on prots to the government. The governments interest in pursuing this matter was later conrmed by the then Minister of Mining, Cesar D az Munoz. Villarzu broached the subject once again in February 1998 while attending the World Economic Forum in Davos, Switzerland. Nonetheless, the contours of the legislation remained fairly vague, and the government only committed itself to conduct a study into the implications of a new tax, which included an assessment of some of the means used by mining companies to reduce their 1174

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tax burden, particularly the use of accelerated depreciation, and mining claim fees as a credit against taxes.36 The proposed tax was to be applied only to new investments in Chile, not to rms which had already established operations. The debate around the Villarzu proposal was more than a debate about the suitability or legitimacy of certain kinds of taxes on the mining sector. At its core it was about the nature of the foreign investment strategy. A senator for one of the parties in the governing coalition (the Party for Democracy), Sergio Bitar underlined this problem in a debate on the subject organiszed by the local mining magazine, Minera Chilena: It will be dicult to repeat this mining boom, so the question is how do we transform mining into a lever for economic development which goes further.37 Although some industry leaders recognised the need to increase the contribution of mining to development, mining executives as a whole unambiguously decried the government initiative as uninformed, discriminatory and negative for the industry. Hernan Hochschild, President of the National Mining Society (SONAMI), the association representing privately owned mining companies, characterised the Villarzu proposal as the most negative fact of the decade.38 As previously indicated, the logic behind the Villarzu proposal was the need to compensate for the supposed failure of foreign rms to pay taxes on prots to the government. This argument emphasised the contribution of state-owned Codelco to national development, and simultaneously cast great doubt on the current and future contributions of the private mining industry. In the mid-1990s Codelco was contributing more than $1000 million per year to the national treasury, while the private sector contributed much less, around $300 350 million (despite producing almost twice as much mineral).39 Because of its historical importance in the Chilean economy, and the staggering sums of money invested in the country, the mining sector had attracted much nationalist attention, and criticism for not meeting the developmental needs of the country. Examples such as Exxons Disputada de Las Condes widely represented in media, government and business circles as not having reported prots in a single year between its initial investment in 1978 and 1998 fuelled this resentment.40 Suspicion of foreign rms was also enhanced by the fact that most mining rms in Chile were not publicly listed companies, and consequently were not required to make their nances public. Mining executives tended to view this criticism as the result of misunderstanding the nature of the industry. One mining executive put it this way:
This industry is not as high margin as people think, but it moves massive amounts of money . . . Everything is enormous, contracts, etc, and that mesmerizes people, they forget how much you invest, and that sometimes copper is at $1.20 and sometimes 70, which makes a big dierence on the return.41

The Villarzu proposal faced an immediate reaction from the mining sector. Representatives from the largest companies organised a powerful lobby 1175

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group with the assistance of Senator Ignacio Perez Walker, a member of the congressional Mining Commission and of the right-wing opposition party, National Renovation (RN). A three-pronged strategy was designed in which separate eorts: 1) targeted the internal fractures between the parties n composing the governing Concertacio coalition, including Ricardo Lagos, then leader of the Party for Democracy (PPD); 2) also targeted the highest ranking members of the Christian Democrats, including the Minister of Economy, Eduardo Aninat and then President Eduardo Frei; and 3) sought consensus among mining rms and the regional centres of mining activity. Mining rms also agreed among themselves to open their accounts to public scrutiny. This was a key element in making the technical argument that extra taxes were unnecessary and inadvisable. The lobbying eort culminated in a personal meeting between Ignacio Perez Walker and President Eduardo Frei on 29 December 1997.42 The Villarzu proposal was opposed by all the mining executives interviewed for this study on two bases: a technical argument, that payment of the prots tax had only been deferred until amortisation payments were completed; and, second, a philosophical argument, that the reform changed the rules of the game and threatened to undermine Chiles reputation as a country with a good investment climate. On the rst point the Chilean legislation permitted accelerated depreciation of the amount invested. Only when enough nancial prots had been earned to pay down the investment would real (taxable) prots be generated. Since most mining investment in Chile was, at that time, relatively new (within the previous ve to 10 years), many companies were still amortising their investments. With huge investments such as Escondida at $2050 million, Collahuasi at $1860 million, or Los Pelambres at $1300 million, it would obviously take some time to pay down the debt and amortise the initial investment.43 According to mining executives, comparison with the revenue generated by Codelco was also unfair. Taxation on Codelco was signicantly higher than on the rest of the industry in Chile (it included both prots tax and the special military tax on sales for a total of 55%). In addition to a higher rate of taxation, the state collected the rest of the surplus thanks to its ownership of the company. Furthermore, Codelco had already amortised most of its assets, and was thus unable to use the principal deduction against prots used by other companies.44 SONAMI commissioned and circulated a paper on taxation in the mining industry. It suggested that there was likely to be a signicant increase in prots tax collected by the national treasury between 2000 and 2008 as private companies reached the end of their amortisation period.45 However, interviews revealed that perhaps the most compelling argument from the point of view of the government was the claim that the Villarzu proposal changed the rules of the game, even though it was only to apply to future investments.46 Opponents of the Villarzu proposal argued that it would seriously damage the reputation of the country, and the foreign investment ows upon which it depended. Over the 1990s Chile had 1176

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developed a well earned reputation as having the most stable and professional business climate in Latin America. This reputation had been fundamental in attracting foreign investment in the mining sector, and also in other sectors of the economy. The extent to which Chilean development in the 1990s was based on huge FDI ows made changing the rules of the game a risky proposition. Furthermore, the international context was not propitious for following up the proposal. The Asian crisis and its eects on the price of metals, especially copper, which fell below 70 a pound in 1998, threw the entire mining sector into crisis, and the country into recession. Many rms, including foreign MNCs had temporarily shut down mines (such as BarrickGolds El Indio, and Phelps-Dodges Ojos del Salar). In this context Chiles eorts were focused on maintaining existing employment levels in the industry. The government abandoned the project for a number of reasons: political opposition (within and outside the Christian Democratic Party); the lobbying eorts of the mining rms and Ignacio Perez Walker in the Chamber of Deputies, Senate, and Congressional Mining Commission; and the low price of copper in 1998.47 On 18 February 1998 President Eduardo Frei publicly reprimanded Juan Villarzu for his proposal, and stated that the government had no plans to increase the taxation rate on the private sector and was committed to stable rules of the game.48 The rules of the game The bargaining experiences of the Villarzu proposal and the Bajo de la Alumbrera royalty dispute oer a window on the interior dynamics of the powerlessness of the state in the era of globalisation. These two cases are interesting because they reveal both that bargaining pressures continue to exist in the mining sector, as predicted by the classic theory of the obsolescing bargain, and that the ability of states to conclude bargains that extract surplus from multinational corporations for the purpose of economic development appears limited. Not only was the bargaining in these cases limited to relatively insignicant issues (small sums of money), but in both cases the attempt to extract more surplus out of the foreign rms failed (in signicant part) because the central government believed that the countrys reputation as one with a good investment climate was worth more than what it would gain from the bargaining. These cases oer us the rich detail necessary to evaluate the three hypotheses presented at the beginning of this article that seek to explain the powerlessness of the state in terms of its ability to negotiate with multinational corporations: the irrelevance of bargaining; the displacement of bargaining; and the dominance of rm bargaining power. The irrelevance of bargaining hypothesis was not supported by the case studies. The argument, that a fundamental shift has occurred in the way states perceive foreign investors, should have meant that both state rm bargaining and the pressure to bargain were things of the past. It appears 1177

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that conicts between the interests of the state and MNCs continue to exist, and that the convergence of policy on economic growth and development should not be overestimated, at least in mining. In the natural resource sector where mines often operate as enclaves, the spill-over eects beyond employment multipliers should not be exaggerated. The host will never have the kind of strategic symbiosis with foreign rms in this sector that it would in high-technology manufacturing for export and therefore we cannot explain the absence of bargaining in terms of such a synergy. While it is true that the general relationship between host country and MNC is vastly improved over the 1970s, we also see that conict and the desire to extract a greater share of the rent from the investment persists. Although bargaining and bargaining pressures may not be irrelevant it is worth noting that the issues over which bargaining occurred were not the big issues of expropriation or majority local ownership which dominated the discourse of the 1970s, but instead relatively small monetary amounts (estimated to be $8 9 million annually in the Minera Alumbrera conict), or in the case of the Villarzu proposal, a proposed tax on new investments which did not threaten the prots of established investors. It is also worth noting that, although the conicts disprove the notion that rms and states have entirely compatible strategies, the fundamental issue in both cases was a challenge to the existing growth strategy of the government. In the Chilean case there were splits within the governing coalition about the appropriate policy towards foreign direct investment, and the Villarzu proposal represented a challenge to the existing orthodoxy. In the Argentine case, where conict was the result of overlapping jurisdiction resulting from the federal structure of the country, the provincial government of Catamarca clearly articulated a dierent strategy (a traditional bargaining approach) towards foreign investors than that advocated by the federal government. Nor can we say that bargaining had been displaced to the international level. According to Ramamurtis hypothesis: if bargaining has been displaced to the international level, then weak rms with the backing of strong states should triumph over host governments (and strong rms backed by weak governments should fail) because of the inuence of home countries at the international level. This hypothesis is not supported by the cases discussed here. Minera Alumbrera is an example of a weak rm (because of its sectoral location) backed by relatively weak governmentsat that time it was owned by Australian and Canadian investors. Minera Alumbrera should have been the paradigmatic example of a bargaining player that would lose; instead, it lost very little. Nonetheless, a curious and unexpected displacement of bargaining did occur when the government of Argentina took the side of the rm against its own provincial governmentexplained by the executives concern that the Catamarca Minera Alumbrera conict had implications far beyond the single rm itself. It was this concern that caused the displacement of bargaining and ultimately the relatively favourable outcome for the rm, not the displacement itself that was causal, as in Ramamurtis thesis. 1178

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Likewise, the interview data do not support the idea that bargains or commitments made at the international level (both Chile and Argentina were tied into a web of such commitments through bilateral investment treaties, free trade agreements and membership in the World Banks Multilateral Investment Guarantee Agency and International Centre for the Settlement of Investment Disputes) were considered particularly important by the actors involved. Not a single person interviewed in either case, nor any published report or statement, suggested that international commitments were being broken or at risk of being broken. Instead the cases suggest the primacy of domestic-level factors, including alliances between domestic and international elites. In both cases, foreign rms were able to broker opposition to the policies through alliances with domestic political elites: in Chile through a right-wing opposition party and the private sector mining association; and in Argentina through an alliance with politicians at the federal level and the principal mining association. In both cases it was this domestic political opposition that was fundamental to defeating (or limiting in the Argentine case) the policy change. The remaining hypothesis, that the state is unable to extract more from foreign rms because the MNC is in the dominant position (because it disposes of more power resources, or the state is highly constrained) seems the most plausible of the three. In the Chilean case the low price of copper in 1998, the fact that some mines were being shut down because of falling protability and that the government was trying to maintain existing employment levels at mines in the face of cutbacks and the overall dependence of the Chilean economy on mining, suggest that the country did not dispose of a great deal of bargaining power relative to foreign rms in general. It appears that subjective considerations are important here as well, as interviews revealed that the government of Catamarca clearly perceived that it was in the dominant bargaining position. The only signicant foreign investment in the provincial economy was in mining, and Catamarca was convinced that the geological fundamentals would drive investmentnot a rigid adherence to policy stability. But at the national level, in both Chile and Argentina, interviews revealed that policy makers and mining executives were virtually unanimous in their concern that the rules of the game not be changed because they feared that changes to the rules would discourage potential foreign investors from investing in all sectors of the national economy. This was the principal argument for the defeat of the Villarzu proposal, and the position taken by the federal government of Argentina against Catamarca. In fact, both Chile and Argentina were dependent on foreign investment inows for high levels of growth and modernisation of their industrial structures. Argentina in particular was, throughout the 1990s, nancing its current account decit with capital inows. Although it may appear that this supports the rst hypothesis, that states do not bargain with rms because their strategies are increasingly seen as complementary, the compatibility of strategy is less important than the fear of losing future investments. Thus the perceived disciplinary eect of reduced investment ows appears to be the major 1179

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inuence on the governments position towards MNCswhich enhances the bargaining power of rms in general vis-a`-vis states. Although the dominance hypothesis is better supported by the case studies than either the irrelevance or displacement of bargaining power, it still remains unsatisfactory on a number of issues. First of all, it is not clear why a particular rm (as was the case with Minera Alumbrera) should benet from more diuse concerns of policy makers regarding all investment inows. This is not a rm or state attribute that confers bargaining power, but instead a systemic characteristic of both the global economy and a particular countrys insertion in it. Second, both of the case studies clearly show the importance of domestic politics, and particularly the links between multinational corporations and domestic political and economic elites. It was this ability to mobilise domestic political opposition at a suciently high level (the national executive in Argentina, and the Congress in Chile) which proved crucial in defeating or arresting the proposals. Third, although it may be said that both countries pursued a growth strategy that envisaged a more co-operative relationship with multinational corporations, the case studies reveal the extent to which the choice of market-playing strategy may be contested within the state apparatus itself, or within ruling parties. The introduction of bargaining opportunities in areas of ambiguous regulatory overlap between two levels of government with dierent strategies toward multinational corporations is a particularly interesting phenomenon, suggesting that sub-national units may nd themselves insulated from some of globalisations exigencies, and that spaces continue to exist where states are not powerless to bargain with rms. Conclusions That the state, especially in the developing world, has lost policy autonomy in the face of globalisation and its agents, particularly multinational corporations, has become an article of faith in international political economy. This paper has examined this broad claim through one of its particular manifestations, the argument that state rm bargaining, once the classic example of how states channelled foreign investment into national development priorities, has itself become obsolete. In a departure from the usual theoretical approach, three hypotheses explaining the obsolescence of state rm bargaining were examined in light of two hitherto unknown case studies of bargaining in developing countries. The paper demonstrated that two popular theoretical approaches to the powerlessness of the state in the era of globalisation, namely 1) that the competition or market-playing state sees foreign investment as complementary to its own objectives and 2) that bargaining may be displaced to the international level, were not supported by the case studies. The third hypothesis, that globalisation has placed the multinational corporation in a dominant power position vis-a`-vis states, was partially substantiated by the case studies. The case studies also demonstrated that subjective and 1180

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relational calculations made by governments, competing political groups, or even dierent levels of government can have a profound impact on whether governments choose to pursue a traditional bargaining strategy or not. The political alliances formed between multinational corporations and domestic political elites also proved extremely important and ecient in protecting foreign rms from potential changes to the rules of the game. Integrating these factors into theoretical accounts of state rm bargaining and the constraints on state policy autonomy engendered by globalisation will improve the t and explanatory capacity of the theories.49 Notes
The doctoral research from which this article was drawn was supported by the Social Science and Humanities Research Council of Canada, the Organization of American States, the Ontario Graduate Scholarship programme and Queens University. I would like to thank Catherine Conaghan for her comments on earlier versions of this paper. 1 T Moran, Multinational Corporations and the Politics of Dependence: Copper in Chile, Princeton, NJ: Princeton University Press, 1974; and R Vernon, Sovereignty at Bay: The Multinational Spread of US Enterprises, New York: Basic Books, 1971. 2 JM Stopford & S Strange, Rival States, Rival Firms: Competition for World Market Shares, Cambridge: Cambridge University Press, 1991; and S Strange, The Retreat of the State: The Diusion of Power in the World Economy, Cambridge: Cambridge University Press, 1996, p 96. 3 H Feigenbaum, J Henig & C Hamnett, Shrinking the State: The Political Underpinnings of Privatization, Cambridge: Cambridge University Press, 1999, p 6; HE Schamis, Re-forming the State: The Politics of Privatization in Latin America and Europe, Michigan: University of Michigan Press, 2002, p 6; N Spulber, Redening the State: Privatization and Welfare Reforms in Industrial and Transnational Economies, Cambridge: Cambridge University Press, 1997, p 75; and SK Vogel, Freer Markets, More Rules, Ithaca, NY: Cornell University Press, 1996, p 257. 4 P Beamish, Multinational Joint Ventures in Developing Countries, Routledge: London, 1988, pp 30 38; T Biersteker, Multinationals, the State, and Control of the Nigerian Economy, Princeton, NJ: Princeton University Press, 1987, pp 18 124; J Dunning, Multinational Enterprise and the Global Economy, Wokingham: Addison-Wesley, 1993, p 553; G Gere, The Pharmaceutical Industry and Dependency in the Third World, Princeton, NJ: Princeton University Press, 1993, pp 151 153; R Grosse, Multinationals in Latin America, London: Routledge, 1989, p 46; and S Kobrin, Testing the bargaining hypothesis in the manufacturing sector in developing countries, International Organization, 41 (4), 1987, p 613. 5 C Kennedy, Jr, Relations between transnational corporations and government of host countries: a look to the future, Transnational Corporations, 1 (1), 1992, pp 68 69; M Minor, The demise of expropriation as an instrument of LDC policy, 1980 1992, Journal of International Business Studies, 25 (1), 1994, p 179; E Safarian, Host country policies towards inward foreign direct investment in the 1950s and 1990s, Transnational Corporations, 8 (2), 1999, p 93; and L Wells, Jr, God and fair competition: does the foreign direct investor face still other risks in emerging markets?, in TH Moran (ed), Managing International Political Risk, Malden, MA: Basil Blackwell, 1998, pp 15 43. 6 UNCTAD, World Investment Report 2000: Cross-border Mergers and Acquisitions and Development, Geneva: United Nations, 2000, p 6. 7 R Yin, The case study crisis: some answers, Administrative Science Quarterly, 26 (1), 1981, p 61. 8 See G King, R. Keohane & S Verba, Designing Social Inquiry: Scientic Inference in Qualitative Research, Princeton, NJ: Princeton University Press, 1994; and A Lijphart, Comparative politics and the comparative method, American Political Science Review, 65 (3), 1971, p 683. 9 J Dunning, Governments and multinational enterprises: from confrontation to cooperation?, Millennium: Journal of International Studies, 20 (2), 1991, pp 225 244; and Y Luo, Toward a cooperative view of MNC host government relations: building blocks and performance indicators, Journal of International Business Studies, 32 (3), 2001, pp 402 403. 10 Stopford & Strange, Rival States, Rival Firms, pp 24 25. 11 T Moran, How does FDI aect host country development? Using industry case studies to make reliable generalizations, in T Moran, E Graham & M Bloomstrom (eds), Does Foreign Direct Investment Promote Development?, Washington, DC: Institute for International Economics and Center for Global Development, 2005, p 286.

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PAUL ALEXANDER HASLAM 12 Safarian, Host country policies, p 108. 13 Ibid, p 106. 14 P Cerny, The Changing Architecture of Politics: Structure, Agency, and the Future of the State, London: Sage Publications, 1990, p 230. 15 R Ramamurti, The obsolescing bargaining model? MNC host developing country relations revisited, Journal of International Business Studies, 32 (1), 2001, pp 29 31, 34. 16 D DeLuca, Trade-related investment measures: US eorts to shape a pro-business world legal system, Journal of International Aairs, 48 (1), Summer 1994, pp 257 271; and P Haslam, BITing back: bilateral investment treaties and the struggle to dene an investment regime for the Americas, Policy & Society, 23 (3), 2004, pp 91 112. See also R Ramamurti, Global regulatory convergence: the case of intellectual property rights, in Robert Grosse (ed), International Business and Government Relations in the 21st Century, Cambridge: Cambridge University Press, 2005, p 348. 17 UNCTAD, World Investment Report 2003: FDI Policies for DevelopmentNational and International Perspectives, Geneva: United Nations, 2003, pp 89, 208 218. 18 A Cosby et al, Investment and Sustainable Development: A Guide to the Use and Potential of International Investment Agreements, Winnipeg: International Institute for Sustainable Development, 2005, pp 5, 13. 19 M Halward-Driemeier, Do bilateral Investment Treaties Attract FDI? Only a Bit . . . and They Could Bite, World Bank Policy Research Working Paper 3121, Washington DC: World Bank, 2003, pp 3, 22 23; and UNCTAD, International Investment Agreements: Flexibility for Development, UNCTAD [Pink] Series on issues in international investment agreements, Geneva: United Nations, 2000, p 1. See also Kevin P Gallagher (ed), Putting Development First: The Importance of Policy Space in the WTO and IFIs, London: Zed Books, 2005. 20 Moran, The changing nature of political risk, pp 71 73. 21 Ibid, p 73. 22 R Cox, Global perestroika, in R Miliband & L Panitch (eds), The Socialist Register 1992, London: Merlin Press, 1992, pp 26 43; and P Hirst & G Thompson, Globalization in Question, Cambridge: Polity Press, 1996, pp 60 69. 23 Panorama Minero (Buenos Aires), February 1998, pp 13 72. 24 Interviews, Buenos Aires, 10 and 19 August 1998. 25 Interview, Buenos Aires, 20 August 1998. 26 Panorama Minero, February 1998, pp 23 24. 27 Interview, Buenos Aires, 19 August 1998. 28 Camara Argentina de Empresarios Mineros, Las regal as mineras en la provincia de Catamarca, unpublished working paper, Camara Argentina de Empresarios Mineros, Buenos Aires, February 1998. 29 Interviews, Catamarca, 12 February 1999. 30 Interviews, Buenos Aires, 10 and 19 August 1998. 31 Interviews, Buenos Aires, 10, 14 and 19 August 1998; 9 September 1998. 32 Interview, Buenos Aires, 9 September 1998. n 33 L Suarez Samper, Una nueva ley para las regal as mineras, La Nacio Online, 8 April 1998, at http:// www.lanacion.com.ar, accessed 1 August 2002. n 34 F Gutierrez, El conicto por regal as, en un callejon sin salida, La Nacio Online, 26 March 2000, at http://www.lanacion.com.ar, accessed 1 August 2002; and A Rebossio, Cortocircuito entre Catamara n y la rma Minera Alumbrera, La Nacio Online, 23 August 2000, at http://www.lanacion.com.ar, accessed 1 August 2002. 35 Miner a Chilena, Chilean Mining Compendium 1998, Santiago: Editec Ltda, 1998, p 47. 36 Minera Chilena, October 1997, p 11. 37 Minera Chilena, November 1997, p 74. 38 H Hochschild, Sonami forsees a dicult scenario for 1998, in Directorio Minero de Chile 1998, Santiago: PuntoDiez SA, 1998, p 86. 39 Interview, Santiago, 12 November 1998. 40 Interviews, Santiago, 2 and 25 November 1998; 19 January 1999. 41 Interview, Santiago, 24 November 1998. 42 C Vera, Impuesto abortado, Que Pasa, 10 16 February 1998, at http://www.quepasa.cl, accessed 1 August 2002; Vera, Caida libre, Que Pasa, 17 23 February 1998, at http://www.quepasa.cl, accessed 1 August 2002; and Vera, Rechazo a propuesta Villarzu sobre impuestos, Que Pasa, 4 February 1998, at http://www.quepasa.cl, accessed 1 August 2002. 43 Interviews, Santiago, 18, 24, 25 and 26 November 1998. 44 K Montalban, Sigue el debate: Nuevos impuestos a la miner a?, Minera Chilena, December 1997, p 105.

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THE FIRM RULES 45 T Flores & C Williamson, Contribucion de la miner a a la recaudacion scal en el mediano plazo, unpublished working paper, Economics Institute, Catholic University of Chile, Santiago, September 1998, pp 15, 17 18. 46 Interview, Santiago, 18 January 1999. 47 Interviews, Santiago, 10 and 12 November 1998. 48 Vera, Caida libre, Que Pasa. 49 A recent attempt to adapt the obsolescing bargain model to include broader political concerns can be seen in L Eden, S Lenway & D Schuler, From the obsolescing bargain to the political bargaining model, in Grosse, International Business and Government Relations in the 21st Century, pp 253 271.

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