In 2006, U.S. interest groups spent $2.44 billion on reported lobbying expenses- approximately $5 million per Congressman.[1] A large portion of that expenditure came from multinational corporations (MNCs), the famed special interests who generate and control large amounts of money and are behind the sinister conspiracies in action thrillers. Notwithstanding fantastical story-telling, it is important to investigate why these corporations spend so much money on Capitol Hill. For a basic starting point, if we know that an agent is profit-motivated, and time after time he spends money on an activity, there lies only one inevitable conclusion: that he believes he would be worse off without doing it. Furthermore, long histories of political lobbying in the world also have shown that, on average, such expenditure pays off. For all the literature on corporate strategy, one area of theory that has been covered in comparatively less detail is that of the political relationship between a MNC and its home country, specifically in terms of the role of the MNC in ultimately affecting its home government’s policies.
Lobbying can be generally defined as the expenditure of resources by a firm or group of firms in order to secure a favorable political or legal environment for their activities. Though lobbying actions are most frequently geared toward achieving preferable domestic policies, larger governments with regional or international influence can be petitioned for favorable foreign policies. Domestic interest groups attempt to gain, often indirectly, economic benefits through a government’s exclusive diplomatic channels. Governments often hold a great deal of information unknown to the private sector, as well as direct contacts with officials and lawmakers of foreign countries. As monopolists of force, states also reserve the threat of war as a means to their ends. Economic interest groups can, instead of expending resources on adjusting their business to market conditions, expend those resources on adjusting market conditions to their business (“rent-seeking”).
For markets, lobbying has profound implications. The law has nearly limitless potential to interfere in the economy. Where there is this capability, laws become a commodity to be bought and sold. A fundamental error to make is to think that politics are non-quantifiable and non-economic. To quite the contrary, political structures are simply markets in which the rules are different (albeit radically at times). “Political entrepreneurship” becomes as much a skill as innovation in one’s industry: if the principal goal is profit for a group of people, then a dollar earned productively or coercively is, other things equal, the same.
The United States is the prime example of a powerful nation whose foreign dealings and economic policies are highly responsive to special interests. Both the structures of the electoral system and the government’s coercive powers grant a significant level of policymaking access to private organizations. A thorough examination of the government’s scope of powers, the structure of policymaking institutions, and the long-term trend of increasing reported lobbying expenditure reveals considerable evidence that political proficiency is part of an essential set of skills for the modern U.S. multinational corporation.
A Model of Multinationals and Lobbying
The political sphere is even more immensely complicated in the absence of the premises upon which the free market functions. Political structures frequently alienate the agent from the results of his actions (or inaction) in some way. The chief structure that causes this alienation is bureaucracy, partly via “diffusion of responsibility” effect. While this phenomenon occurs to some degree in free markets with large firms,[2] it is less of a problem, because productive deficiencies are more quickly answered by declines in profits and labor market adjustments. The obstacle is most often described as the principal-agent problem, which is especially pronounced in government. Whereas in the private sector, the “principal” at hand is concerned with easily quantifiable profits, the objectives of government institutions are much more specific, varied, and difficult to measure. On one hand, firms are naturally controlled by productivity, and in turn, profits; on the other, governments are validated simply by force and by the cost inefficiency of rapid change (revolution). Though democracies require input from the entire population, their input is channeled through a central decision-making and enforcement process; this should not be mistaken for the kind of integration of dispersed information that markets have. The end-state of a market is the product of an aggregation of many individuals associating in ways that benefit them individually, each person possessing a small amount of resources (relative to the rest of the economy). Alternatively, the end-state of government is the product of a pre-established institutional structure (e.g., a constitution) determining how to allocate a large amount of resources.
That the agents involved in government seek the maximization of their individual utility should not be ignored. In fact, this is the core assumption that does not differ between private and public activity. The agent does not change; only his constraints do. Though this view may appear to some as cynical, the basic intuition behind it is that while the costs of some kinds of choices may differs, an agent’s preferences generally do not change upon attaining public office. As might be argued, a sense of duty or responsibility (conscience?) may develop, altering the agent’s utility function. Nevertheless, it is clearly too limited to overcome the bureaucratic risk-reward gap.
For purposes of simplicity, we will assume that firms as a whole attempt to maximize their profits, without the risk of individual actors in the firm placing their own individual benefit above the firm’s profit (e.g. no corrupt CEOs trying to swindle shareholders). The objective of this investigation is to examine the specific nature of the relationship between rational market actors and government institutions.
It was stated earlier that laws are a commodity to be bought and sold. Beyond mere metaphor, we can construct a model that recognizes that political institutions are entities that possess the ability to, ceteris paribus, exogenously impose any desired condition of operation on market processes. Because these institutions are operated by individuals who are factually no different than market actors, the result is that these individuals possess some degree of that exogenous power for use at their own discretion. They are liable for what they do with it, but not completely. It is this discrepancy that subjects policymaking to a certain level of autonomy, and thus subjects it to market forces. From these assumptions, we can model the lobby-subsidy process.
The interaction between firms and the government can be summarized by the following model, beginning with a firm’s basic profit function:
pd = pm + s – EL (1)
A domestic firm’s profit, pd, is a linear function of the firm’s exogenous market profit (pm), plus subsidies (s), minus lobbying expenditure (EL). Prior to any government assistance, a firm makes a certain level of profit; they can then receive more profits via subsidy from the government, but must count their expenditure in attaining those subsidies against them. EL is not only meant to contain formalized lobbying spending conducted through institutions established for that purpose, but any expenditure of resources on attempting to influence political outcomes (the primary means being appeals to officeholders’ individual interests). EL includes election campaign contributions to candidates who promise to reflect their contributors’ interests and any promises of special employment or other benefits after a policymaker’s term in office. It also consists of the payment of lawyers to assist policymakers in drafting the language of policies and experts to assist in implementation.
Next, we must consider the interests of the policymaker, and his obligation to the public:
Ug = rEL – f(Cp)a (2)
The government policymaker’s utility, Ug, is the difference between the benefits received from private interests and a penalty caused by institutional mechanisms for public accountability. The first component is the product of some proportion r times the firm’s lobbying expenditure EL, representing the amount of EL that government agents “capture” for their own gain. Lower values for r tend to indicate more reliable institutional structures separating private from public interests. If r had a value of one, lobbying expenditure would essentially be direct bribery in exchange for arbitrary decree. The more that a firm has to spend in figuring out how the law works, what kind of law would benefit them the most, and other institutional intricacies, the lower r is.
The second component constitutes the role of the public in holding policymakers accountable for their decisions. It is the product of some proportion f times the perceived cost (to the public) of a policy, raised to an exponent a. a can be taken to represent the level of public attentiveness and responsiveness to how their tax dollars are used, and it is assumed that a ≥ 1 (if it were otherwise, the public would penalize the government marginally less for each extra dollar it spends- an absurd outcome). f represents the institutional manifestation of the public’s attitude: the higher it is, the more sensitive policymaking must be to public opinion. We also constrain this parameter between 0 and 1, for practical purposes.
Thus far, we only defined public opinion as a function of the perceived cost of a subsidy, which is actually defined by the actual cost of the subsidy minus some error:
Cp = Cs – ui (3)
Moreover, the cost of a subsidy is the quotient of the subsidy’s value over some efficiency proportion F > 0:
s = F*Cs (4)
Thus, substituting (4) into (3) and then into (2), we have
Ug = rEL – f(S/F – ui)a (5)
F represents how cost-effectively the government can perform the policy at hand. ui indicates the level of misinformation the public has about the cost of a subsidy.
Taking the first-order conditions of each equation (i.e. optimizing firm profits and government utility with respect to the choice variables, s and EL), we attain an equilibrium level of s:
s = ((r*F/a*f)1/(a-1) + ui)*F (6)
From this, general intuition can be drawn about how each parameter affects the equilibrium subsidy value- in more plain language, how institutional, economic, and political environments determine the incentive structure for policymakers’ behavior. In short, differentiating with respect to each parameter individually yields the following results: greater government efficiency increases subsidies (dF/ds > 0); structural corruption increases s (dr/ds > 0); misinformation increases s (dui/ds > 0); Public responsiveness decreases s (da/ds < 0); and strong public institutions decrease s (df/ds < 0).
The model operates on a short-run, ad hoc basis; the equilibrium value reflects optimization from a single firm’s perspective at a particular point in time. Appropriately, the parameters differ depending on the specific firm’s (or industry’s) case, the institutional nature of the policy in question, the public attitude toward the symbolic issues, etc. For the most part, this is concordant with the reality of the assumed profit-maximizing firms: they are willing to gain at anyone else’s expense. Overall, the model given above is not intended to deal with quantitative specifics, but to create an overarching cost-benefit analysis of one method of altering a firm’s profits: exploiting politics. It is sufficiently abstract to accommodate any form of government which allows for some degree of private property, whether it is a dictatorship or a modern liberal democracy; the parameters are what change, but not the logic.
Symbolic vs. Instrumental Policy as tools for economic gain
With quantitative reasoning in mind, we can begin to examine the qualitative aspects of the lobby-subsidy process. The distinction between “symbolic” and “instrumental” policy, a concept outlined by Murray Edelman in The Symbolic Uses of Politics (1964), is critical to fully understanding how MNCs (or any special interests, for that matter) can successfully have their private interests supported by government policies, even when those policies are detrimental to the public as a whole. He discusses the reality of the gap between the symbols invoked when policy decisions are being made and the actual instrumental, material status of such policies (i.e. what kinds of resource transfers the policy entails). These symbols are aimed at triggering conditioned responses, and are meant to be a substitute for the actual things they represent. For example, “the elimination of poverty” is supposed to trigger a positive response in favor of a policy, but its implementation may in fact be a tax break for the wealthy.
In accordance with that idea, important lobbying strategy lies in promoting favorable ideas to support firm or industry-specific goals. The aim is to achieve ideological or empirical consensus in policymakers and in, more importantly, the public. While some expenditure for this objective is through private organizations, the end result when it is successful is a favorable alteration of the law.[3]
Besides the standard range of direct government benefits which multinational corporations seek for their domestic markets (direct subsidies, tax breaks, etc.), MNCs often pursue policies that positively affect their standing as international companies (or negatively affect their competitors’). This could mean, for example, arguing for a tariff that may not be necessarily to inhibit a rival’s trade, but to make its production inputs more expensive if it depends heavily on outsourced components. MNCs can lobby for direct negotiations or even the use of force between its home country and a potential host country in order to increase its stock of investment abroad. These are but two examples of the many ways in which MNCs can attain indirect subsidies, whose legislative elements frequently obscure their ultimate beneficiaries who, in public discussion, are supplanted by symbolic language.
U.S. MNC Lobbying in the 90s to the Present
American institutions have a long history of lobbying, beginning in essence with the first amendment of the Constitution: “[Congress shall make no law abridging] the right of the people peaceably to assemble, and to petition the government for a redress of grievances.” Increasing demand for lobbyists in the late 1980s led to a growth in popularity of the practice, and the “Washington Game” began to perpetuate itself. The high demand also changed the traditional viewpoint that it was inappropriate for former elected officials to become lobbyists. Since 1998, 43 percent of the 198 members of Congress who are no longer in any elected office have registered as lobbyists at least once.[4] The overall result of this evolution is the ever-increasing presence of private money circulating in public affairs. The bottom line is that to the American politician, money matters greatly. In the 2002 midterm elections, candidates who spent more money than their opponents won 95% of all contested House seats and 75% of all Senate seats.[5]
In context of the model provided, there are many examples of the significant influence of multinational corporations on economic policy. America, despite being considered the most laissez-faire major power, is a massive provider of corporate welfare. A symbolic and instrumental assessment of most recent U.S. policy relating to multinationals bears very strong explanatory power. Partisan politics serve as a major front for symbolic stratification of policy. Generally, at least some semblance of connection between the larger stated ideological issues and the actual policies must exist. Though members of both the Democrat and Republican parties regardless receive immense contributions from multinationals, the prime political actors on behalf of large MNCs usually consist of Republicans, likely due to their ideological platforms which usually involve deregulation, trade liberalization, belief in the strength of entrepreneurship, and so forth. These beliefs, ironically, are used as the symbols to mask the economic interventionism of subsidizing large MNCs.
Given the general claims stated up to this point, the next inquiry must be into their actual historical relevance: what contemporary examples are there of MNCs demonstrating a palpable influence on U.S. policy? The difficulty of finding information on the topic is testament to the transparency that MNCs often enjoy in their lobbying activities, at least in regards to the general public. To discover the appropriate connections, one must integrate diffuse pieces of information from diverse sources in order to draw the connection between a particular firm’s action and how a government policy was determined. Furthermore, lobbying disclosure law is only relatively new, with the Lobbying Disclosure Act having been only passed in 1995. Besides the fact that lobbying activities falling under the guidelines of the law were sometimes underreported (especially during the first few years), there are still many methods of lobbying that have no legal disclosure requirements. These include “revolving door” offers, personal favors, insider information, and other transactions that frequently have no official paper trail. Discovering these obscure relationships beyond mere speculation is a matter of intensive research, including investigative reporting across many sources that only provide small amounts of information individually. For now, we will briefly explore two major and well-known contemporary examples of multinational industries that engage in and profit from abundant political activity: pharmaceuticals and petroleum.
The pharmaceuticals and health products industry constituted the largest portion of reported political contributions in 1998-2006, spending over $1 million. Their critical policy objectives focus on international recognition of “intellectual property” rights to their drugs, in order to undermine cheaper competitive drugs which cut into their market shares, and the elimination of price controls caused by growing desires for healthcare guarantees.[6]
The pharmaceutical industry deals primarily with products that prolong or improve the bodily well-being of humans. In most societies, the act of “saving lives” is a moral priority, or at least a noble deed. It is no surprise, then, that all related policies are couched in strongly symbolic terms. Their public claims are broadly reflected by statements such as “without [assistance on this issue] from government, expensive research on important drugs will stop and many life-saving implements will not be available.”
The industry’s influence on international trade is very palpable and significant. Its trade association, Pharmaceutical Research and Manufacturers of America (PhRMA) includes Pfizer Inc., GlaxoSmithKline Plc, Merck & Co Inc., primarily functioning as a means to increase transparency of individual companies’ political influence. PhRMA has filed 59 lobbying reports concerning the Office of the U.S. Trade Representative, more than any other organization historically. Drafts of the Dominican Republic-Central American Free Trade Agreement echo the pharmaceutical industry’s sentiments about price controls and intellectual property. Under its provisions, member nations will be required to comply with deregulated pricing and international patent laws. An examination of the voting record for implementing DR-CAFTA demonstrates almost unanimous votes along party lines: only 15 Democrats voted for the measure, and only 27 Republicans voted against it.[7] Furthermore, in light of CAFTA in 2005, Guatemala was pressured to repeal a law that would allow for increased marketing of generic drugs as long as the drugs were demonstrated to behave like approved drugs. The U.S. ambassador to Guatemala issued presented an ultimatum: Guatemala had to change its law to provide the clinical study data exclusivity mandated by CAFTA, or the U.S. Congress would not allow them membership.[8]
The oil industry, especially in extraction and transportation, is the beneficiary of a large amount of both direct and indirect subsidies. Two of the most significant (relating to their international position) are in the use of government resources in protecting their assets abroad as well as expanding their potential asset base, and in their lack of responsibility for environmental externalities caused by the consumption of fossil fuels.
The physical security of oil drills, pipelines, and shipping lanes constitutes billions of dollars of U.S. government services. Friendly diplomatic relations must be maintained with major exporter countries, especially those with U.S.-owned holdings. Likewise, military force must be readily available to combat any attempt to seize or otherwise disrupt oil supplies by foreign aggressors. Besides maintaining existing American assets and relationships, the government has also engaged in policies in seeking out new sources of oil. One need only imagine a world that did not need petroleum, and aptly ask: “would our foreign policy be the same if that were the case?” It is misleading, of course, to characterize the government’s heavy interest in maintaining and expanding oil supplies as only a resource transfer to large oil companies, as much income in America is authentically dependent on the energy generated by oil. Nonetheless, it is still a subsidy that discourages substitutes and conservation.
It is no surprise that Republicans advocate the very symbolic policy goal of an aggressive outward foreign policy. According to the Center for Reponsive Politics, in the 2006 election cycle, Republicans received 84% of all campaign contributions from the oil industry. While oil interests may not be the sole explanation of their foreign policy goals, they stand as part of a wider variety of interests that share common goals, such as defense contractors. A glimpse at the news today reveals that the price of oil per gallon to the customer is as much a leading economic statistic as the stock indexes. The “price at the pump” has become a highly symbolic issue, and many Americans often complain that gas prices have been allowed to become too high and that something ought to be done about it. To some, this means moving to alternative fuel sources. To oil companies, it is an opportunity to continue arguing for the necessity of oil on the basis of economic growth, appealing to the average American’s lifestyle.
The issue of global climate change has particularly in the last decade led to political gamesmanship from major corporate interests in the oil industry. The Kyoto protocols, negotiated and signed by the Clinton administration in 1997, were drafted with the objective of “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”[9] This would entail the reduction of emissions, either via increased automobile efficiency among other conservation measures, or even possibly the development of permanent alternative fuel sources- a clear threat to the oil industry’s many sunken capital costs. Exxon-Mobil, the largest oil company in the world and contributor of the greatest amount of U.S. lobbying dollars in its industry, has undertaken a strong anti-global-warming campaign, funding private think-tanks to promote uncertainty over global warming and the economic danger of environmental regulations. Not surprisingly, their business model is suited primarily for research and development in oil extraction and refinement, and they hold several oil assets abroad, including major pipelines in Siberia and Africa.
Oil companies like Exxon-Mobil had quickly realized that they needed to win the war against the Kyoto protocols and all other climate control policies, and doing so would require the scientific agreement of the public, and in turn Congress. In 1998, the New York Times revealed a leaked American Petroleum Institute (an organization whose membership includes Exxon-Mobil) memo aimed at addressing the ubiquitous presence of global climate concerns. Its proposed organization, the Global Climate Science Data Center, would serve several useful functions, among them, “identifying and establishing cooperative relationships with all major scientists whose research in this field supports our position,” and “developing opportunities to maximize the impact of scientific views consistent with ours with Congress, the media and other key audiences.” It is quite clear that no matter where the evidence lies for global warming phenomena, money is pushed into politics in a manner concurrent with partisanship over science. [10]
In Opensecrets.org’s special election report, “President Bush’s First 100 Days: A Look at How the Special Interests Have Fared,” the section subtitled “Energy” begins bluntly: “If there were any doubt that President Bush and Vice President Cheney, two former oil executives, would be sympathetic to the interests of energy companies, it has been put to rest in the first 100 days of the new administration.”[11] Evidence of a “revolving door”-style administration is abundant with respect to the petroleum industry. In 2001, Exxon-Mobil lobbyist Randy Randol sent a memo to the White House requesting that Intergovernmental Panel on Climate Change (IPCC) chairman Robert Watson resign. Though he did not resign, his reelection was blocked one year later.[12] In 2003, the Bush administration officially denounced the Kyoto protocols. Presently, the administration shows few signs of substantively addressing the global warming issue, and the “lame-duck” period will likely prolong that trend until 2009.
Conclusions
The omnipresence of private interests bearing significant influence on governmental policy is not unknown or surprising to most people. However, an understanding of the process of how these interests come to affect government policies is important for the MNC strategy theorist, for the foundations that underlie it must be considered as new developments in globalization world governance begin to surface. Greater empirical study of the effects of political dollars on profits can yield great insight into the causes MNC decision-making, along with possible reforms to counteract the exploitation of political systems for subsidies, but it is ultimately limited by the obscure nature of the interpersonal dealings and complexity of publicized procedures that constitute the lobbying-subsidy process. More exploration of the broad spectrum of powers such as multilateral institutions that can be tapped for MNC benefit can also explain how government intervention is still not out of the question in a rapidly globalizing economy.
[1] Lobbying Database, Center for Responsive Politics. http://www.opensecrets.org/lobbyists/index.asp (Accessed April 3, 2007)
[2] These large firms, because of their size, require bureaucracy-like institutions in order to effectively manage their vast resources.
[3] This is a quasi-political function of corporations that is captured exogenously in ui in order to keep the lobbying-subsidy model simple.
[4] “Lobbying in the United States.” Wikipedia. http://en.wikipedia.org/wiki/Lobbying_in_the_United_States
[5] Compiled from Opensecrets.org.
[6] “Pharmaceutical Industry Spent $800M on Lobbying Over 7 Years, Report States.” Medical News Today. http://www.medicalnewstoday.com/medicalnews.php?newsid=27125
[7] “The U.S. Congress Votes Database.” The Washington Post. http://projects.washingtonpost.com/congress/109/house/1/votes/443/
[8] “CAFTA, Data Protection and Generic Drugs.” Embassy of the United States: Guatemala. http://guatemala.usembassy.gov/factsheetcaftagenerics.html
[9] The United Nations Framework Convention on Climate Change. http://unfccc.int/essential_background/convention/background/items/1353.php.
[10] Global Climate Science Communications: Action Plan. The American Petroleum Institute. http://www.euronet.nl/users/e_wesker/ew@shell/API-prop.html
[11]“President Bush’s First 100 Days: A Look at How the Special Interests Have Fared,” Center for Responsive Politics. http://www.opensecrets.org/bush/100days/energy.asp
[12] Mooney, Chris. “Some Like it Hot.” Mother Jones. http://www.motherjones.com/news/feature/2005/05/some_like_it_hot.html